ARRIS Announces Preliminary and Unaudited Third Quarter 2010 Results

Oct 27, 2010, 16:00 ET from ARRIS Group, Inc.

SUWANEE, Ga., Oct. 27 /PRNewswire-FirstCall/ -- ARRIS Group, Inc. (Nasdaq: ARRS), today announced preliminary and unaudited financial results for the third quarter 2010.

Revenues in the third quarter 2010 were $274.3 million, as compared to third quarter 2009 revenues of $275.8 million and compared to second quarter 2010 revenues of $280.4 million.  Through the first three quarters of 2010 and 2009, revenues were $821.3 million and $807.8 million, respectively.

Adjusted net income (a non-GAAP measure) in the third quarter 2010 was $0.19 per diluted share, compared to $0.25 per diluted share for the third quarter 2009 and $0.24 per diluted share for the second quarter of 2010.  Year to date, adjusted net income was $0.67 per diluted share for 2010 as compared to $0.69 per diluted share in 2009.

GAAP net income in the third quarter 2010 was $0.11 per diluted share, as compared to third quarter 2009 GAAP net income of $0.17 per diluted share and second quarter 2010 GAAP net income of $0.15 per diluted share. Year to date, GAAP net income was $0.41 per diluted share in 2010 as compared to GAAP net income of $0.45 per diluted share in 2009.  Significant GAAP items that have been excluded in computing adjusted net income and adjusted net income per diluted share include amortization of intangible assets, equity compensation, non-cash interest expense, 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 2010 was 37.2%, which compares to the third quarter 2009 gross margin of 41.9% and the second quarter 2010 gross margin of 40.4%.  As expected, margins declined as a result of a shift in product mix.

The Company ended the third quarter 2010 with $640.4 million of cash, cash equivalents and short-term investments, up in the aggregate by approximately $78.6 million from the end of the third quarter 2009 and down $23.0 million from the end of the second quarter 2010. The Company generated $12.5 million of cash from operating activities during the third quarter 2010 and $95.9 million through the first nine months of 2010, which compares to $63.1 million and $171.2 million during the same periods in 2009, respectively.  Order backlog at the end of the third quarter 2010 was $119.6 million as compared to $169.5 million and $174.1 million at the end of the third quarter 2009 and the second quarter 2010, respectively.  The Company's book-to-bill ratio in the third quarter 2010 was 0.80 as compared to the third quarter 2009 of 1.01 and the second quarter 2010 of 0.92.

"Third quarter financial results came in as we had forecast with CPE sales during the quarter at the highest level since 2007," said Bob Stanzione, ARRIS Chairman & CEO. "As a result of our efforts to expand our portfolio with new IP video based products, as well as the increased demand that we anticipate for our core products, we continue to see our total addressable market growing significantly in the coming years."

During the quarter the Company demonstrated its video, data and voice products at the IBC Show in Amsterdam. These product solutions provide European operators with a competitive technical and business case advantage based on the Company's decades of expertise in developing IP technologies. The Company also demonstrated its video, data, fixed and wireless voice solutions to Brazilian cable operators at the ABTA Cable Exhibition in Sao Paulo, Brazil.  In addition, the Company added two new customers in Korea for its CMTS platform and a major MSO customer in Germany for its universal edge QAM product.  

"Of note, in the third quarter, we repurchased approximately 1.7 million shares of ARRIS common stock for $15.6 million and repurchased $14.0 million (face value) of Convertible Notes for $13.5 million.  Year to date, we have repurchased 3.8 million shares and $19.0 million (face value) of Convertible Notes for an aggregate purchase price of $57.6 million.  With respect to the fourth quarter 2010, we now project that revenues for the Company will be in the range of $250 to $275 million, with adjusted net income per diluted share in the range of $0.14  to $0.18 and GAAP net income per diluted share, in the range of $0.05 to $0.09," said David Potts, ARRIS EVP & CFO.  

ARRIS management will conduct a conference call at 5:00 pm EDT, today, Wednesday, October 27, 2010, to discuss these results in detail.  You may participate in this conference call by dialing 888-679-8038 or 617-213-4850 for international calls prior to the start of the call and providing the ARRIS Group, Inc. name, conference pass code 59527542 and Jim Bauer as the moderator.  Please note that ARRIS will not accept any calls related to this earnings release until after the conclusion of the 5:00pm EDT conference call.  A replay of the conference call can be accessed approximately two hours after the call through Tuesday, November 2, 2010 by dialing 888-286-8010 or 617-801-6888 for international calls and using the pass code 69800362.  A replay also will 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, Georgia, USA, ARRIS has R&D centers in Suwanee, GA; Beaverton, OR; Chicago, IL; Kirkland, WA; State College, PA; Wallingford, CT; Waltham, 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 2010, full year 2010, 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 2010 as well as the general outlook for 2011 and beyond 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 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; 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 uncertain current economic climate and 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, 2010.  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,



2010


2010


2010


2009


2009












ASSETS






















Current assets:











Cash and cash equivalents


$          351,894


$    370,932


$    500,044


$        500,565


$          461,795

Short-term investments, at fair value


288,463


292,421


161,012


125,031


99,917

Total cash, cash equivalents and short term investments


640,357


663,353


661,056


625,596


561,712












Restricted cash


4,480


4,478


4,476


4,475


4,473

Accounts receivable, net


133,915


139,673


139,207


143,708


119,125

Other receivables


2,654


6,368


3,057


6,113


2,235

Inventories, net


89,203


78,830


79,907


95,851


100,024

Prepaids


8,934


10,196


10,546


11,675


10,764

Current deferred income tax assets


28,585


30,469


37,324


35,994


32,883

Income taxes recoverable


17,094


5,943


-


3,106


2,026

Other current assets


11,253


15,386


14,328


15,790


15,167

Total current assets


936,475


954,696


949,901


942,308


848,409












Property, plant and equipment, net


56,816


56,128


56,223


57,195


58,339

Goodwill


235,109


235,122


235,256


235,388


234,416

Intangible assets, net


177,560


186,529


195,551


204,572


201,351

Investments


29,591


29,485


25,435


20,618


30,574

Noncurrent deferred income tax assets


6,560


6,127


6,298


6,759


3,593

Other assets


6,129


6,755


8,050


8,776


7,648



$       1,448,240


$ 1,474,842


$ 1,476,714


$     1,475,616


$       1,384,330























LIABILITIES AND STOCKHOLDERS' EQUITY






















Current liabilities:











Accounts payable


$            52,011


$      72,652


$      44,523


$          53,979


$            42,659

Accrued compensation, benefits and related taxes


25,913


20,696


23,639


36,936


27,054

Accrued warranty


3,504


3,539


3,632


4,265


5,292

Deferred revenue


36,029


44,913


53,024


47,044


35,423

Current portion of long-term debt


12


50


87


124


148

Current deferred income tax liability


-


-


-


-


250

Other accrued liabilities


25,891


24,476


42,978


46,203


34,979

Total current liabilities


143,360


166,326


167,883


188,551


145,805

Long-term debt, net of current portion


204,053


212,914


214,131


211,248


208,433

Accrued pension


17,383


17,058


16,733


16,408


18,914

Noncurrent income taxes payable


16,509


16,523


16,248


14,815


10,632

Noncurrent deferred income tax liabilities


32,193


28,705


33,577


37,204


35,188

Other noncurrent liabilities


14,926


15,704


16,871


16,021


15,301

Total liabilities


428,424


457,230


465,443


484,247


434,273












Stockholders' equity:











Preferred stock


-


-


-


-


-

Common stock


1,406


1,405


1,402


1,388


1,385

Capital in excess of par value


1,199,184


1,194,829


1,187,854


1,183,872


1,177,958

Treasury stock at cost


(115,248)


(99,645)


(79,019)


(75,960)


(75,960)

Unrealized gain (loss) on marketable securities


(374)


217


2


28


(60)

Unfunded pension liability


(6,041)


(6,041)


(6,041)


(6,041)


(8,070)

Accumulated deficit


(58,927)


(72,969)


(92,743)


(111,734)


(145,012)

Cumulative translation adjustments


(184)


(184)


(184)


(184)


(184)

Total stockholders' equity


1,019,816


1,017,612


1,011,271


991,369


950,057



$       1,448,240


$ 1,474,842


$ 1,476,714


$     1,475,616


$       1,384,330



ARRIS GROUP, INC.

PRELIMINARY CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)


















For the Three Months


For the Nine Months


Ended September 30,


Ended September 30,


2010


2009


2010


2009


(unaudited)


(unaudited)


(unaudited)


(unaudited)









Net sales

$    274,286


$    275,772


$    821,338


$    807,811

Cost of sales

172,299


160,299


493,562


479,548

Gross margin

101,987


115,473


327,776


328,263

Operating expenses:








Selling, general, and administrative expenses

33,913


36,311


103,489


110,782

Research and development expenses

35,138


30,909


105,041


89,447

Restructuring charges

-


73


73


785

Amortization of intangible assets

8,970


9,281


27,013


27,807


78,021


76,574


235,616


228,821

Operating income

23,966


38,899


92,160


99,442

Other expense (income):








Interest expense

4,533


4,356


13,728


13,121

Gain on investments

(369)


(238)


(400)


(453)

Loss on foreign currency

94


1,114


283


3,642

Interest income

(399)


(424)


(1,469)


(1,172)

Gain on debt retirement

(263)


-


(378)


(4,152)

Other (income) expense, net

280


(263)


107


(887)

Income from continuing operations before income taxes

20,090


34,354


80,289


89,343

Income tax expense

6,048


12,655


27,482


31,853

Net income

$      14,042


$      21,699


$      52,807


$      57,490









Net income per common share








Basic

$          0.11


$          0.17


$          0.42


$          0.46

Diluted

$          0.11


$          0.17


$          0.41


$          0.45









Weighted average common shares:








Basic

125,237


125,326


125,927


124,381

Diluted

127,638


129,695


129,103


127,916



ARRIS GROUP, INC.

PRELIMINARY CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


















For the Three Months


For the Nine Months






Ended September 30,


Ended September 30,






2010


2009


2010


2009






(unaudited)


(unaudited)


(unaudited)


(unaudited)













Operating Activities:










Net income


$      14,042


$      21,699


$      52,807


$      57,490



Depreciation


5,837


5,408


16,893


15,370



Amortization of intangible assets


8,969


9,281


27,012


27,807



Stock compensation expense


5,785


4,260


16,058


11,714



Deferred income tax provision (benefit)


4,939


9,751


2,598


13,678



Amortization of deferred finance fees


170


180


527


548



Provision for doubtful accounts


(209)


11


83


1



Gain on investments


(370)


(238)


(401)


(453)



Loss (gain) on disposal of fixed assets


337


(76)


369


(46)



Non-cash interest expense


2,781


2,772


8,548


8,308



Gain on debt retirement


(263)


-


(378)


(4,152)



Excess income tax benefits from stock-based compensation plans


(36)


(1,471)


(2,683)


(2,027)


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











Accounts receivable


5,967


9,830


9,710


40,801



Other receivables


3,930


2,359


2,760


539



Inventory


(10,373)


16,641


6,648


30,449



Income taxes payable/recoverable


(11,165)


(4,800)


(14,173)


(2,868)



Accounts payable and accrued liabilities


(22,603)


(9,757)


(42,226)


(32,620)



Other, net


4,796


(2,800)


11,789


6,665




Net cash provided by operating activities


12,534


63,050


95,941


171,204













Investing Activities:










Purchases of property, plant, and equipment


(6,862)


(3,459)


(17,127)


(14,327)


Cash paid for acquisition, net of cash acquired


-


(7,930)


-


(8,130)


Cash proceeds from sale of property, plant & equipment


-


207


243


208


Purchases of investments


(100,461)


(93,079)


(331,547)


(151,845)


Disposals of investments


104,760


20,479


159,914


54,416




Net cash used in investing activities


(2,563)


(83,782)


(188,517)


(119,678)













Financing Activities:










Payment of debt obligations


(38)


(49)


(112)


(121)


Early redemption of long-term debt


(13,531)


-


(18,331)


(10,556)


Repurchase of common stock


(15,603)


-


(39,288)


-


Excess income tax benefits from stock-based compensation plans


36


1,471


2,683


2,027


Repurchase of shares to satisfy employee tax withholdings


3


-


(6,422)


(2,180)


Proceeds from issuance of common stock


124


4,259


5,375


11,205




Net cash provided by (used in) financing activities


(29,009)


5,681


(56,095)


375
















Net increase (decrease) in cash and cash equivalents


(19,038)


(15,051)


(148,671)


51,901

Cash and cash equivalents at beginning of period


370,932


476,846


500,565


409,894

Cash and cash equivalents at end of period


$    351,894


$    461,795


$    351,894


$    461,795



ARRIS GROUP, INC.

PRELIMINARY SUPPLEMENTAL NET INCOME RECONCILIATION

(in thousands, except per share data)

(unaudited)



Q1 2010


Q2 2010


Q3 2010


September YTD 2010




Per Diluted




Per Diluted




Per Diluted




Per Diluted


Amount


Share


Amount


Share


Amount


Share


Amount


Share

Net income

$        18,991


$                0.15


$        19,774


$                0.15


$    14,042


$                0.11


$    52,807


$                0.41

















Highlighted items:
















Impacting gross margin:
















Stock compensation expense

433


-


481


-


491


-


1,405


0.01

















Impacting operating expenses:
















Acquisition costs, restructuring and other

52


-


21


-


-


-


73


-

Amortization of intangible assets

9,022


0.07


9,022


0.07


8,969


0.07


27,013


0.21

Stock compensation expense

4,088


0.03


5,272


0.04


5,294


0.04


14,654


0.11

















Impacting other (income) / expense:
















Non-cash interest expense

2,883


0.02


2,884


0.02


2,781


0.02


8,548


0.07

Gain on retirement of debt

-


-


(115)


-


(263)


-


(378)


-

















Impacting income tax expense:
















Adjustments of income tax valuation allowances and research & development credits and other

1,222


0.01


(351)


-


(1,040)


(0.01)


(169)


-

Tax related to highlighted items above

(5,505)


(0.04)


(6,170)


(0.05)


(6,133)


(0.05)


(17,808)


(0.14)

















Total highlighted items

12,195


0.09


11,044


0.08


10,099


0.08


33,338


0.26

Net income excluding highlighted items

$        31,186


$                0.24


$        30,818


$                0.24


$    24,141


$                0.19


$    86,145


$                0.67

















Weighted average common shares - diluted



129,975




130,690




127,638




129,103


















































Q1 2009


Q2 2009


Q3 2009


September YTD 2009




Per Diluted




Per Diluted




Per Diluted




Per Diluted


Amount


Share


Amount


Share


Amount


Share


Amount


Share

Net income

$        12,882


$                0.10


$        22,909


$                0.18


$    21,699


$                0.17


$    57,490


$                0.45

















Highlighted items:
















Impacting gross margin:
















Stock compensation expense

303


-


366


-


394


-


1,063


0.01

















Impacting operating expenses:
















Acquisition costs, restructuring and other

120


-


592


-


348


-


1,060


0.01

Amortization of intangible assets

9,263


0.07


9,263


0.07


9,281


0.07


27,807


0.22

Stock compensation expense

3,098


0.02


3,687


0.03


3,866


0.03


10,651


0.08

















Impacting other (income) / expense:
















Non-cash interest expense

2,818


0.02


2,718


0.02


2,772


0.02


8,308


0.06

Gain on retirement of debt

(4,152)


(0.03)


-


-


-


-


(4,152)


(0.03)

















Impacting income tax expense:
















Adjustments of income tax valuation allowances and research & development credits and other

1,455


0.01


-


-


(166)


-


1,289


0.01

Tax related to highlighted items above

(3,646)


(0.03)


(5,322)


(0.04)


(6,218)


(0.05)


(15,186)


(0.12)

















Total highlighted items

9,259


0.07


11,304


0.09


10,277


0.08


30,840


0.24

Net income excluding highlighted items

$        22,141


$                0.18


$        34,213


$                0.27


$    31,976


$                0.25


$    88,330


$                0.69

















Weighted average common shares - diluted



124,920




128,054




129,695




127,916



















With respect to stock compensation expense,  ARRIS records non-cash compensation expense related to grants of options and restricted stock.  Depending upon the size, timing and the terms of the grants, this non-cash compensation expense may vary significantly.  With respect to amortization of intangibles, the intangibles being amortized relate to our acquisitions.  The acquisition costs, restructuring, and other reflect items that, although they or similar items might recur, are of a nature and magnitude that identifying them separately provides investors with a greater ability to project ARRIS’  future performance.    With respect to the convertible debt non-cash interest, ARRIS records non-cash interest expense related to the 2013 convertible debt as a result of the adoption of FSP ABP 14-1 on January 1, 2009.   Disclosing the non-cash piece provides investors with the information regarding interest that will not be paid out in cash.     In both 2010 and 2009, income tax expense adjustments were recorded for state valuation allowances and research and development tax credits.  During the first quarter of 2009, and the second & third quarters of 2010,  ARRIS repurchased a portion of their convertible debt and recognized a gain of approximately $4.2 million, $0.1 million and $0.3 million, respectively.  

In assessing operating performance and preparing budgets and forecasts, ARRIS’ management considers performance after making these adjustments and believes that providing investors with the same information provides greater transparency and insight into management’s analysis.

ARRIS GROUP, INC.

PRELIMINARY SUPPLEMENTAL OPERATING INCOME RECONCILIATIONS

(unaudited)

(in thousands)

















Q1 2010

Q2 2010

Q3 2010


Sept 2010 YTD








Operating Income as reported


$ 33,955

$ 34,239

$ 23,966


$           92,160

Operating Income as a % of sales


13%

12%

9%


11%

Highlighted Items:







Stock compensation expense


4,521

5,753

5,785


16,059

Acquisition costs, restructuring and other


52

21

-


73

Amortization of intangible assets


9,022

9,022

8,969


27,013

Operating Income excluding highlighted items


47,550

49,035

38,720


135,305

Operating Income excluding highlighted items as a % of sales


18%

17%

14%


16%































Q1 2009

Q2 2009

Q3 2009


Sept 2009 YTD








Operating Income as reported


$ 22,389

$ 38,154

$ 38,899


$           99,442

Operating Income as a % of sales


9%

14%

14%


12%

Highlighted Items:







Stock compensation expense


3,401

4,053

4,260


11,714

Acquisition costs, restructuring and other


120

592

348


1,060

Amortization of intangible assets


9,263

9,263

9,281


27,807

Operating Income excluding highlighted items


35,173

52,062

52,788


140,023

Operating Income excluding highlighted items as a % of sales


14%

19%

19%


17%



ARRIS GROUP, INC.

Net Income Reconciliation (unaudited)

Q4 2010 EPS Guidance





Estimated GAAP EPS

$0.05 - $0.09

Reconciling Items


   Amortization of Intangibles (after tax)

$0.05

   Stock Compensation Expense (after tax)

$0.03

   Non-Cash Interest - Convertible Debt (after tax)

$0.01

   Subtotal

$0.09

Estimated Adjusted (Non-GAAP) EPS

$0.14 - $ 0.18



See the Preliminary Supplemental Net Income Reconciliation for a discussion regarding these adjustments and management's reasoning for providing this adjusted financial measure.



SOURCE ARRIS Group, Inc.



RELATED LINKS

http://www.arrisi.com