ARRIS Announces Preliminary and Unaudited Third Quarter 2012 Results

 

SUWANEE, Ga.Oct. 24, 2012 /PRNewswire/ -- ARRIS Group, Inc. (NASDAQ: ARRS), today announced preliminary and unaudited financial results for the third quarter 2012.

Revenues in the third quarter 2012 were $357.5 million as compared to third quarter 2011 revenues of $274.4 million and as compared to second quarter 2012 revenues of $349.3 million.  Through the first three quarters of 2012 and 2011, revenues were$1,009.7 million and $807.6 million, respectively. 

Adjusted net income (a non-GAAP measure) in the third quarter 2012 was $0.22 per diluted share, compared to $0.21 per diluted share for the third quarter 2011 and $0.25 per diluted share for the second quarter 2012.  Year to date, adjusted net income was $0.66 per diluted share for 2012 as compared to $0.60 per diluted share in 2011.

GAAP net income in the third quarter 2012 was $0.15 per diluted share, as compared to third quarter 2011 GAAP net income of $0.11 per diluted share and second quarter 2012 GAAP net income of $0.13 per diluted share. Year to date, GAAP net income was $0.33 per diluted share in 2012 as compared to GAAP net income of $0.34 per diluted share in 2011.  Significant GAAP items that have been adjusted in computing adjusted net income and adjusted net income per diluted share include: acquisition accounting impacts related to acquired deferred revenue;  amortization of intangible assets;  long-term investment impairment;  loss on the sale of a product line; equity compensation;  non-cash interest expense;  acquisition and  restructuring charges; and  certain discrete tax items. A reconciliation of adjusted net income to GAAP net income per diluted share is attached to this release and also can be found on the Company's website (www.arrisi.com).

Gross margin for the third quarter 2012 was 31.3%, which compares to the third quarter 2011 gross margin of 36.5% and the second quarter 2012 gross margin of 33.9%.

The Company ended the third quarter of 2012 with $571.2 million of cash resources, which includes $548.4 million of cash, cash equivalents and short-term investments, and $22.8 million of long-term marketable security investments, as compared to$576.3 million, in the aggregate, at the end of the second quarter of 2012. During the third quarter 2012, the Company repurchased approximately 0.8 million shares of ARRIS common stock for $10.4 million.  Year to date the Company has repurchased approximately 4.5 million shares for $51.9 million.  The Company generated $6.7 million of cash from operating activities during the third quarter 2012 and $72.6 million through the first nine months of 2012, which compares to $24.5 millionand $52.3 million, respectively, during the same periods in 2011.

Order backlog at the end of the third quarter 2012 was $185.8 million as compared to $155.3 million and $251.9 million at the end of the third quarter 2011 and the second quarter 2012, respectively. The Company's book-to-bill ratio in the third quarter 2012 was 0.82 as compared to the third quarter 2011 of 1.00 and the second quarter 2012 of 0.93.

"I am very pleased with our third quarter and year to date results as we continue to see strong demand for our products.  We just completed a successful SCTE Expo show in Orlando where we showcased our new E6000 Converged Edge Router," saidBob Stanzione, ARRIS Chairman and CEO.  "The level of engagement with our customers is outstanding and I am very encouraged by the alignment of our products with their investment priorities." 

"Our third quarter results were strong, with adjusted net income per share in the upper half of our guidance," said David Potts, ARRIS EVP & CFO.  "With respect to the fourth quarter 2012, we now project that revenues for the Company will be in the range of $345 to $365 million, with adjusted net income per diluted share in the range of $0.26 to $0.30 and GAAP net income per diluted share in the range of $0.13 to $0.17, reflecting higher demand for our CMTS product line."

ARRIS management will conduct a conference call at 5:00 pm EDT, today, Wednesday, October 24, 2012, to discuss these results in detail. You may participate in this conference call by dialing (888) 713-4209 or (617) 213-4863 for international calls prior to the start of the call and providing the ARRIS Group, Inc. name, conference pass code 70703648, and Bob Puccini as the moderator. 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 October 30, 2012 by dialing (888) 286-8010 or (617) 801-6888 and using the pass code 74972935. Live internet access to the call will be available through the Investor Relations section of the Company's website at www.arrisi.com.  A replay will also be made available for a period of 12 months following the conference call on ARRIS' website at www.arrisi.com.

About ARRIS

ARRIS is a global communications technology company specializing in the design, engineering and supply of technology supporting triple- and quad-play broadband services for residential and business customers around the world. The company supplies broadband operators with the tools and platforms they need to deliver converged IP video solutions, carrier-grade telephony, demand driven video, next-generation advertising, network and workforce management solutions, access and transport architectures and ultra high-speed data services. Headquartered in Suwanee, GAUSA, ARRIS has R&D centers inSuwanee, GABeaverton, ORLisle, ILKirkland, WAState College, PATel Aviv, IsraelWallingford, CTWaltham, MA;Cork, Ireland; and Shenzhen, China, and operates support and sales offices throughout the world. Information about ARRIS products and services can be found at www.arrisi.com.

 

Forward-looking statements:

Statements made in this press release, including those related to:

  • growth expectations and business prospects;
  • revenues and net income for the fourth quarter 2012 and beyond;
  • expected sales levels and acceptance of new ARRIS products; and
  • 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 2012 as well as the general outlook for 2013 are based on preliminary estimates, assumptions and projections that management believes to be reasonable at this time, but are beyond management's control;
  • ARRIS' customers operate in a capital intensive consumer based industry, and the current economic uncertainty or changes in customer spending may adversely impact their ability or willingness to purchase the products that the Company offers; and
  • because the market in which ARRIS operates is volatile, actions taken and contemplated may not achieve the desired impact relative to changing market conditions and the success of these strategies will be dependent on the effective implementation of those plans while minimizing organizational disruption.

In addition to the factors set forth elsewhere in this release, other factors that could cause results to differ from current expectations include: the current volatility in the capital markets, its impact on our customers' plans and access to capital; the impact of rapidly changing technologies; the impact of competition on product development and pricing; the ability of ARRIS to react to changes in general industry and market conditions including regulatory developments; rights to intellectual property, market trends and the adoption of industry standards; and consolidations within the telecommunications industry of both the customer and supplier base.  These factors are not intended to be an all-encompassing list of risks and uncertainties that may affect the Company's business. Additional information regarding these and other factors can be found in ARRIS' reports filed with the Securities and Exchange Commission, including its Form 10-Q for the quarter ended June 30, 2012.  In providing forward-looking statements, the Company expressly disclaims any obligation to update publicly or otherwise these statements, whether as a result of new information, future events or otherwise.

 

ARRIS GROUP, INC.

PRELIMINARY CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

                     
                     
   

September 30,

 

June 30,

 

March 31,

 

December 31,

 

September 30,

   

2012

 

2012

 

2012

 

2011

 

2011

                     

ASSETS

                   
                     

Current assets:

                   

  Cash and cash equivalents

 

$       188,653

 

$       199,395

 

$       215,808

 

$       235,875

 

$       354,659

  Short-term investments, at fair value

 

359,753

 

340,166

 

298,539

 

282,904

 

220,318

  Total cash, cash equivalents and short term investments

548,406

 

539,561

 

514,347

 

518,779

 

574,977

                     

  Restricted cash

 

4,665

 

3,942

 

3,943

 

4,101

 

3,647

  Accounts receivable, net

 

171,143

 

179,371

 

183,427

 

152,437

 

165,821

  Other receivables 

 

578

 

1,414

 

5,071

 

8,789

 

5,296

  Inventories, net

 

137,496

 

102,361

 

105,114

 

115,912

 

116,769

  Prepaids

 

12,408

 

12,124

 

12,436

 

10,408

 

10,692

  Current deferred income tax assets

 

20,787

 

21,972

 

22,068

 

22,048

 

24,239

  Other current assets

 

18,907

 

16,766

 

16,792

 

27,071

 

21,695

  Total current assets

 

914,390

 

877,511

 

863,198

 

859,545

 

923,136

                     

Property, plant and equipment, net 

 

54,593

 

56,175

 

57,810

 

61,375

 

57,619

Goodwill

 

194,469

 

194,626

 

195,268

 

194,542

 

233,430

Intangible assets, net

 

102,258

 

110,000

 

117,444

 

124,823

 

141,784

Investments

 

57,483

 

70,967

 

82,968

 

71,095

 

47,221

Noncurrent deferred income tax assets

 

49,589

 

47,228

 

42,106

 

38,433

 

9,637

Other assets

 

9,913

 

10,575

 

11,699

 

10,997

 

5,400

   

$     1,382,695

 

$     1,367,082

 

$     1,370,493

 

$     1,360,810

 

$     1,418,227

                     
                     

LIABILITIES AND STOCKHOLDERS' EQUITY

                   
                     

Current liabilities:

                   

  Accounts payable

 

$         49,061

 

$         44,800

 

$         54,576

 

$         40,671

 

$         38,918

  Accrued compensation, benefits and related taxes

 

35,066

 

28,165

 

31,081

 

36,764

 

25,320

  Accrued warranty

 

3,036

 

2,995

 

3,094

 

3,350

 

2,933

  Deferred revenue

 

50,859

 

63,023

 

60,129

 

43,746

 

39,094

  Other accrued liabilities

 

21,768

 

23,980

 

31,054

 

33,325

 

19,653

  Total current liabilities

 

159,790

 

162,963

 

179,934

 

157,856

 

125,918

Long-term debt, net of current portion

 

218,943

 

215,823

 

212,765

 

209,766

 

206,825

Accrued pension

 

26,172

 

25,696

 

25,739

 

25,260

 

17,989

Accrued severance liability, net of current portion

 

3,895

 

3,758

 

3,884

 

4,191

 

-

Noncurrent income taxes payable

 

24,434

 

26,676

 

26,676

 

24,450

 

22,471

Noncurrent deferred income tax liabilities

 

334

 

340

 

352

 

337

 

21,117

Other noncurrent liabilities

 

20,362

 

21,039

 

22,372

 

22,745

 

16,253

  Total liabilities

 

453,930

 

456,295

 

471,722

 

444,605

 

410,573

                     

Stockholders' equity:

                   

  Preferred stock

 

-

 

-

 

-

 

-

 

-

  Common stock

 

1,479

 

1,473

 

1,467

 

1,449

 

1,446

  Capital in excess of par value

 

1,270,561

 

1,259,946

 

1,247,763

 

1,245,115

 

1,237,852

  Treasury stock at cost

 

(306,330)

 

(295,960)

 

(280,724)

 

(254,409)

 

(220,034)

  Unrealized gain (loss) on marketable securities

 

74

 

211

 

149

 

(267)

 

26

  Unfunded pension liability

 

(10,231)

 

(10,231)

 

(10,231)

 

(10,231)

 

(5,813)

  Accumulated deficit

 

(26,604)

 

(44,468)

 

(59,469)

 

(65,268)

 

(5,639)

  Cumulative translation adjustments

 

(184)

 

(184)

 

(184)

 

(184)

 

(184)

  Total stockholders' equity

 

928,765

 

910,787

 

898,771

 

916,205

 

1,007,654

   

$     1,382,695

 

$     1,367,082

 

$     1,370,493

 

$     1,360,810

 

$     1,418,227

                     
 

 

 

 

 ARRIS GROUP, INC.

 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,

 

2012

 

2011

 

2012

 

2011

               

Net sales

$   357,432

 

$    274,374

 

$  1,009,660

 

$   807,609

Cost of sales

245,480

 

174,250

 

670,274

 

503,641

Gross margin

111,952

 

100,124

 

339,386

 

303,968

Operating expenses:

             

Selling, general, and administrative expenses

37,866

 

35,220

 

117,544

 

107,926

Research and development expenses

42,978

 

36,065

 

130,006

 

108,734

Acquisition costs

30

 

475

 

739

 

475

Loss on sale of product line

-

 

-

 

337

 

-

Restructuring charges

213

 

969

 

6,455

 

969

Amortization of intangible assets

7,742

 

8,944

 

22,565

 

26,832

 

88,829

 

81,673

 

277,646

 

244,936

Operating income 

23,123

 

18,451

 

61,740

 

59,032

Other expense (income):

             

Interest expense

4,479

 

4,277

 

13,251

 

12,681

Loss (gain) on investments

(878)

 

253

 

(1,483)

 

(504)

Loss (gain) on foreign currency

(431)

 

(841)

 

917

 

125

Interest income

(764)

 

(775)

 

(2,248)

 

(2,438)

Loss on debt redemption

-

 

19

 

-

 

19

Other (income) expense, net

(129)

 

(150)

 

(791)

 

(681)

Income from continuing operations before income taxes

20,846

 

15,668

 

52,094

 

49,830

Income tax expense

2,982

 

1,955

 

13,430

 

7,863

Net income 

$     17,864

 

$     13,713

 

$       38,664

 

$     41,967

               

Net income per common share:

             

Basic

$        0.16

 

$         0.11

 

$          0.34

 

$        0.35

Diluted

$        0.15

 

$         0.11

 

$          0.33

 

$        0.34

               

Weighted average common shares:

             

Basic

113,709

 

119,283

 

114,206

 

121,115

Diluted

116,346

 

121,237

 

116,348

 

123,549

               
 

 

 

ARRIS GROUP, INC.

PRELIMINARY CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

         

 

For the Three Months

 

 

For the Nine Months

         

Ended September 30,

 

Ended September 30,

         

2012

 

2011

 

2012

 

2011

                       

Operating Activities:

               
 

Net income

 

$         17,864

 

$         13,713

 

$       38,664

 

$       41,967

   

Depreciation

 

6,788

 

5,882

 

20,965

 

17,550

   

Amortization of intangible assets

 

7,742

 

8,944

 

22,565

 

26,832

   

Amortization of deferred finance fees

 

159

 

161

 

479

 

487

   

Non-cash interest expense

 

3,120

 

2,883

 

9,177

 

8,604

   

Deferred income tax provision (benefit)

 

(1,184)

 

(4,084)

 

(10,904)

 

(15,487)

   

Stock compensation expense

 

6,678

 

5,738

 

21,194

 

16,947

   

Provision for doubtful accounts

 

-

 

(1)

 

54

 

(1)

   

Loss on debt retirement

 

-

 

19

 

-

 

19

   

Loss on sale of product line

 

-

 

-

 

337

 

-

   

Loss (gain) on disposal of fixed assets

 

34

 

(27)

 

40

 

6

   

Loss (gain) on investments

 

(877)

 

253

 

(1,482)

 

(504)

   

Excess tax benefits from stock-based compensation plans

(154)

 

258

 

(2,614)

 

(2,989)

 

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

               
   

Accounts receivable

 

8,228

 

(13,384)

 

(19,515)

 

(39,887)

   

Other receivables

 

794

 

(6,134)

 

8,187

 

(17)

   

Inventory

 

(35,135)

 

(3,749)

 

(25,139)

 

(15,006)

   

Income taxes payable/recoverable

 

(6,509)

 

5,362

 

1,943

 

17,953

   

Accounts payable and accrued liabilities

 

(2,522)

 

9,148

 

2,614

 

(6,332)

   

Other, net

 

1,716

 

(520)

 

6,043

 

2,129

     

Net cash provided by operating activities

 

6,742

 

24,462

 

72,608

 

52,271

                       

Investing Activities:

               
 

Purchases of investments

 

(94,995)

 

(85,263)

 

(235,348)

 

(228,104)

 

Disposals of investments

 

88,898

 

80,796

 

172,059

 

260,227

 

Purchases of property & equipment, net

 

(5,264)

 

(6,401)

 

(14,520)

 

(18,948)

 

Cash proceeds from sale of property & equipment

 

13

 

27

 

13

 

70

 

Cash proceeds from sale of product line

 

-

 

-

 

3,249

 

-

     

Net cash provided by (used in) investing activities

 

(11,348)

 

(10,841)

 

(74,547)

 

13,245

                       

Financing Activities:

               
 

Early redemption of long-term debt

 

-

 

(4,984)

 

-

 

(4,984)

 

Repurchase of common stock

 

(10,370)

 

(17,101)

 

(51,921)

 

(74,748)

 

Excess income tax benefits from stock-based compensation plans

154

 

(258)

 

2,614

 

2,989

 

Repurchase of shares to satisfy employee tax withholdings

 

(132)

 

(15)

 

(8,184)

 

(8,260)

 

Fees and proceeds from issuance of common stock, net

 

4,212

 

3,115

 

12,208

 

21,025

     

Net cash used in financing activities

 

(6,136)

 

(19,243)

 

(45,283)

 

(63,978)

                       
     

Net increase (decrease) in cash and cash equivalents

(10,742)

 

(5,622)

#

(47,222)

 

1,538

Cash and cash equivalents at beginning of period

 

199,395

 

360,281

 

235,875

 

353,121

Cash and cash equivalents at end of period

 

$       188,653

 

$       354,659

 

$      188,653

 

$      354,659

                       
 

 

 

ARRIS GROUP, INC.

PRELIMINARY SUPPLEMENTAL SALES & NET INCOME RECONCILIATION

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

                                 
 

(in thousands, except per share data)

Q1 2012

 

Q2 2012

 

Q3 2012

 

YTD 2012

       

Per Diluted

     

Per Diluted

     

Per Diluted

     

Per Diluted

   

Amount

 

Share

 

Amount

 

Share

 

Amount

 

Share

 

Amount

 

Share

 

Sales 

$  302,901

     

$  349,327

     

$  357,432

     

$ 1,009,660

   
                                 
 

Highlighted items:

                             
 

Purchase accounting impacts of deferred revenue

1,771

 

0.02

 

663

 

0.01

 

546

 

-

 

2,980

 

0.03

 

Sales excluding highlighted items

$  304,672

     

$  349,990

     

$  357,978

     

$ 1,012,640

   
                                 
                                 
   

Q1 2012

 

Q2 2012

 

Q3 2012

 

YTD 2012

       

Per Diluted

     

Per Diluted

     

Per Diluted

     

Per Diluted

   

Amount

 

Share

 

Amount

 

Share

 

Amount

 

Share

 

Amount

 

Share

 

Net income

$     5,799

 

$           0.05

 

$    15,001

 

$           0.05

 

$    17,864

 

$           0.05

 

$      38,664

 

$           0.05

                                 
 

Highlighted items:

                             
 

Impacting gross margin:

                             
 

Purchase accounting impacts of deferred revenue

1,258

 

0.01

 

663

 

0.01

 

546

 

-

 

2,467

 

0.02

 

Stock compensation expense

750

 

0.01

 

809

 

0.01

 

808

 

0.01

 

2,367

 

0.02

                                 
 

Impacting operating expenses:

                             
 

Acquisition costs

607

 

0.01

 

102

 

-

 

30

 

-

 

739

 

0.01

 

Restructuring

5,203

 

0.04

 

1,039

 

0.01

 

213

 

-

 

6,455

 

0.06

 

Amortization of intangible assets

7,379

 

0.06

 

7,444

 

0.06

 

7,742

 

0.07

 

22,565

 

0.19

 

Loss of sale of product line

337

 

-

 

-

 

-

 

-

 

-

 

337

 

0.00

 

Stock compensation expense

5,899

 

0.05

 

7,058

 

0.06

 

5,870

 

0.05

 

18,827

 

0.16

                                 
 

Impacting other (income) / expense:

                             
 

Non-cash interest expense

2,999

 

0.03

 

3,058

 

0.03

 

3,120

 

0.03

 

9,177

 

0.08

 

Impairment of investment

-

 

-

 

466

 

-

 

-

 

-

 

466

 

-

                                 
 

Impacting income tax expense:

                             
 

Adjustments of income tax valuation allowances and other

-

 

-

 

-

 

-

 

(4,183)

 

(0.04)

 

(4,183)

 

(0.04)

 

Tax related to highlighted items above

(8,121)

 

(0.07)

 

(6,749)

 

(0.06)

 

(6,362)

 

(0.05)

 

(21,232)

 

(0.18)

                                 
 

Total highlighted items

16,311

 

0.14

 

13,890

 

0.12

 

7,784

 

0.07

 

37,985

 

0.33

 

Net income excluding highlighted items

$    22,110

 

$           0.19

 

$    28,891

 

$           0.25

 

$    25,462

 

$           0.22

 

$      76,463

 

$           0.66

                                 
 

Weighted average common shares - diluted

   

117,597

     

115,111

     

116,346

     

116,348

                                 
                                 
                                 
   

Q1 2011

 

Q2 2011

 

Q3 2011

 

YTD 2011

       

Per Diluted

     

Per Diluted

     

Per Diluted

       
   

Amount

 

Share

 

Amount

 

Share

 

Amount

 

Share

 

Amount

   
 

Sales 

$  267,436

     

$  265,799

     

$  274,374

     

$    807,609

   
                                 
 

Highlighted items:

                             
 

Purchase accounting impacts of deferred revenue

-

 

-

 

-

 

-

 

-

 

-

 

-

   
 

Sales excluding highlighted items

$  267,436

     

$  265,799

     

$  274,374

     

$    807,609

   
                                 
                                 
   

Q1 2011

 

Q2 2011

 

Q3 2011

 

YTD 2011

       

Per Diluted

     

Per Diluted

     

Per Diluted

     

Per Diluted

   

Amount

 

Share

 

Amount

 

Share

 

Amount

 

Share

 

Amount

 

Share

 

Net income (loss)

$    11,564

 

$           0.09

 

$    16,690

 

$           0.13

 

$    13,713

 

$           0.11

 

$      41,967

 

$           0.34

                                 
 

Highlighted items:

                             
 

Impacting gross margin:

                             
 

Stock compensation expense

437

 

-

 

557

 

-

 

525

 

-

 

1,519

 

0.01

                                 
 

Impacting operating expenses:

                             
 

Acquisition costs

-

 

-

 

-

 

-

 

475

 

-

 

475

 

-

 

Restructuring

-

     

-

 

-

 

969

 

0.01

 

969

 

0.01

 

Amortization of intangible assets

8,944

 

0.07

 

8,944

 

0.07

 

8,944

 

0.07

 

26,832

 

0.22

 

Stock compensation expense

4,847

 

0.04

 

5,368

 

0.04

 

5,213

 

0.04

 

15,428

 

0.12

                                 
 

Impacting other (income) / expense:

                             
 

Non-cash interest expense

2,832

 

0.02

 

2,889

 

0.02

 

2,883

 

0.02

 

8,604

 

0.07

 

Loss on retirement of debt

-

 

-

 

-

 

-

 

19

 

-

 

19

 

-

                                 
 

Impacting income tax expense:

                             
 

Adjustments of income tax valuation allowances and other

(3,583)

 

(0.03)

 

-

 

-

 

(2,334)

 

(0.02)

 

(5,917)

 

(0.05)

                                 
 

Tax related to highlighted items above

(5,024)

 

(0.04)

 

(4,915)

 

(0.04)

 

(5,265)

 

(0.04)

 

(15,204)

 

(0.12)

                                 
 

Total highlighted items

8,453

 

0.07

 

12,843

 

0.10

 

11,429

 

0.09

 

32,725

 

0.26

 

Net income excluding highlighted items

$    20,017

 

$           0.16

 

$    29,533

 

$           0.24

 

$    25,142

 

$           0.21

 

$      74,692

 

$           0.60

                                 
 

Weighted average common shares - diluted

   

125,732

     

123,711

     

121,237

     

123,549

                                 
                                 
                                 
 

See the Notes to GAAP / Adjusted Non-GAAP Financial Measures 

                       
                                 
 

 

 

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:

Purchase Accounting Impacts Related to Deferred Revenue:  In connection with our acquisition of BigBand, 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. 

Stock-Based Compensation Expense: We have excluded the effect of stock-based compensation expenses in calculating our non-GAAP operating expenses and net income 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 options and restricted stock. 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 Costs:  We have excluded the effect of acquisition related and other expenses and the effect of restructuring expenses in calculating our non-GAAP operating expenses and net income measures. We incurred significant expenses in connection with our recent acquisition of BigBand, which we generally would not have otherwise incurred in the periods presented as part of our continuing operations. Acquisition related expenses consist of transaction costs, costs for transitional employees, other acquired employee related costs, and integration related outside services. We believe it is useful to understand the effects of these items on our total operating expenses.

Restructuring Costs:  We have excluded the effect of restructuring charges in calculating our non-GAAP operating expenses and net income measures. Restructuring expenses consist of employee severance, abandoned facilities, and other exit costs. We believe it is useful to understand the effects of these items on our total operating expenses.

Loss on Sale of Product Line:  We have excluded the effect of a loss on the sale of a product line in calculating our non-GAAP operating expenses and net income measures.  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 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.

Early Pension Payout:  In an effort to reduce volatility and administrative expense in connection with the Company's pension plan, we have offered certain participants an opportunity to voluntarily elect an early payout of their pension benefits.  We anticipate recording a charge in the fourth quarter of 2012 of approximately $3 million, dependant upon the actual number of participants who elect the payout option.  We intend to exclude this charge in our fourth quarter Non-GAAP measures, as this is a one-time charge that is not considered by management in their review of financial results.

Non-Cash Interest on Convertible Debt:  We have excluded the effect of non-cash interest in calculating our non-GAAP operating expenses and net income measures. We record the accretion of the debt discount related to the equity component non-cash interest expense. We believe it is useful to understand the component of interest expense that will not be paid out in cash.

Impairment of Investment:  We have excluded the effect of an other-than-temporary impairment of a cost method investment 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). 

Loss (Gain) on Retirement of Debt:  We have excluded the effect of the loss (gain) on retirement of debt in calculating our non-GAAP financial measures.  We believe it is useful for investors to understand the effect of this non-cash item in our other expense (income).

Income Tax Expense:  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 state valuation allowances, research and development tax credits and provision to return differences.

SOURCE ARRIS Group, Inc.