EX-99.1 2 g11783exv99w1.htm EX-99.1 PRESS RELEASE EX-99.1 PRESS RELEASE
 

EXHIBIT 99.1
ARRIS ANNOUNCES PRELIMINARY AND UNAUDITED
FOURTH QUARTER AND FULL YEAR 2007 RESULTS
Suwanee, Ga. (February 14, 2008) ARRIS Group, Inc. (NASDAQ:ARRS), a global technology leader in the development of advanced cable telephony, next generation high-speed data, demand driven video solutions, operations software and broadband access equipment, today announced preliminary and unaudited financial results for the fourth quarter and full year 2007.
Fourth quarter 2007 revenues of $249.6 million grew by $15.0 million or 6%, as compared to the fourth quarter 2006, but decreased by $5.1 million or 2% as compared to third quarter 2007. Fourth quarter 2007 revenues included approximately $6.6 million of post acquisition sales (December 15, 2007 — December 31, 2007) of former C-COR products. The sequential decline in revenue is predominantly the result of lower sales of E-MTAs. For full year 2007, revenues were $992.2 million, up $100.6 million or approximately 11% as compared to full year 2006 revenues. The revenue growth in 2007 was a result of continuing demand for the Company’s Voice over IP (VoIP) and high speed data and video products as cable operators aggressively sign up customers for the “triple-play” offerings of voice, data and video services.
Non-GAAP net income in the fourth quarter 2007 was $0.16 per diluted share, as compared to the fourth quarter 2006 of $0.32 per diluted share, and as compared to the third quarter 2007 of $0.21 per diluted share. The sequential decline quarter over quarter reflects primarily the lower revenue as well as lower margins associated with the introduction of the ARRIS Universal EdgeQAM (D5) as well as the dilutive effects of the December 2007 closing of the C-COR transaction. GAAP net income in the fourth quarter 2007 was $0.08 per diluted share, as compared to the fourth quarter 2006 of $0.64 per diluted share, and as compared to the third quarter 2007 of $0.25 per diluted share. Net income per diluted share on a non-GAAP and GAAP basis for the full year 2007 were $0.79 and $0.87, respectively, and compare to $1.04 and $1.30, respectively, in 2006. 2007 net income reflects income tax expense of approximately $41.0 million, as compared to an income tax benefit of $34.8 million in 2006 resulting from the reduction of deferred tax valuation allowances during the fourth quarter 2006.
Significant non-GAAP items include: in-process research and development expense, equity compensation expense, amortization of intangibles, restructuring/product line exit accruals and adjustments, certain acquisition gains and expenses, and certain tax benefits and costs. A reconciliation of GAAP to non-GAAP earnings per share is attached to this release and also can be found on the Company’s website (www.arrisi.com).

 


 

In conjunction with the acquisition of C-COR, the Company implemented a new organizational structure in December, 2007. As a result, effective with fourth quarter 2007 results, ARRIS began reporting financial results in three segments: Broadband Communications Systems; Access, Transport and Supplies, and Media & Communication Systems. A summary of quarterly revenue and gross margin for each of the segments for 2007 can be found on the Company’s website.
The Company ended 2007 with $391.8 million of cash and short-term investments, which compares to $549.2 million at the end of 2006. The Company generated $52.8 million of cash from operating activities in the fourth quarter and $63.4 million for the year. The Company used $367.6 million of cash in the fourth quarter for the acquisition of C-COR, including related expenses. The Company acquired $120.2 million of cash and short-term investments in connection with the C-COR acquisition.
Order backlog at the end of 2007 was $136.7 million that included approximately $42 million of open orders from C-COR for delivery in the next twelve months. Excluding the impacts from the C-COR acquisition, the Company’s book to bill ratio in the fourth quarter was approximately 1.00.
At the completion of the acquisition of C-COR, the Company recorded the fair value of the assets acquired and liabilities assumed as a result of the transaction. As previously described, the revaluation of certain items will have an impact on future results when compared to historic C-COR results; most notably deferred revenue, deferred cost, amortization expense, inventory and in-process research and development expense. A summary of the anticipated impact of certain key purchase accounting items can be found on the Company’s website.
“2007 was a year of growth and outstanding execution on all fronts for ARRIS”, said Bob Stanzione, ARRIS Chairman & CEO. “Our products achieved continued success throughout the world as we maintained our leadership position in key technology areas. 2007 was also a momentous year for ARRIS. We were able to add significant new products, enhance key customer relationships and substantially add to our outstanding talent pool as we successfully completed the acquisition of C-COR. With the integration of the two companies successfully underway, we now have a more complete portfolio of market leading voice, data, video products and software solutions that will help our customers meet the growing competitive forces that they are facing. Our new technologies have gained early technical and market acceptance and our strong cash position enabled us to make a key strategic acquisition for the future. We are pleased with the acquisition of C-COR and the opportunities in front of the new, combined Company.”

 


 

“As we enter 2008, we believe certain short-term dynamics may impact us, particularly in the first half of the year,” said David Potts, ARRIS EVP & CFO. “While we continue to see robust demand from the majority of our customer base, we anticipate that sales to our largest customer will be lower. As a result, we now project that revenues for the Company in the first quarter 2008 will be in the range of $270 to $285 million with non-GAAP net income per diluted share in the range of $0.08 to $0.12 and GAAP net income per diluted share, in the range of $0.00 to $0.04. It is important to note that when comparing both our non-GAAP and GAAP guidance to the sum of historic ARRIS and C-COR results, earnings per share in the first quarter will be adversely affected by approximately $0.03 as a result of purchase accounting impacts, in particular deferred revenue. Looking forward, we continue to believe that demand for our products will be strong as our customers compete to deliver increasingly content rich services to their subscribers.”
ARRIS management will conduct a conference call at 5:00pm EST, today, Thursday, February 14, 2008, to discuss these results in detail. You may participate in this conference call by dialing 888-713-4217 or 617-213-4869 for international calls prior to the start of the call and providing the ARRIS Group, Inc. name, conference passcode 97486089 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 EST conference call. A replay of the conference call can be accessed approximately two hours after the call through Tuesday, February 19, 2008 by dialing 888-286-8010 or 617-801-6888 for international calls and using the passcode 79832180. A replay also will be made available for a period of 12 months following the conference call on ARRIS’ website at www.arrisi.com.
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 reliable telephony, demand driven video, next-generation advertising and high-speed data services. ARRIS products expand and help grow network capacity with access and outside plant construction equipment, reliably deliver voice, video and data services and assure optimal service delivery for end customers. Headquartered in Suwanee, Georgia, USA, ARRIS has R&D centers in Atlanta, Chicago, Beaverton, State College, Wallingford, Ireland and China, and operates support and sales offices throughout the world. Information about ARRIS products and services can be found at http://www.arrisi.com.
Forward-looking statements:
Statements made in this press release, including those related to:

 


 

    first quarter and 2008 revenues and net income;
 
    income tax expense impacts;
 
    impacts related to the C-COR Incorporated acquisition;
 
    anticipated sales to Comcast;
 
    expected sales levels and acceptance of certain ARRIS products;
 
    the general market outlook; and
 
    the outlook for industry trends
are forward-looking statements. These statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in these statements. Among other things,
    projected results for the first quarter as well as the general outlook for 2008 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;
 
    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 September 30, 2007. 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.
CONSOLIDATED BALANCE SHEETS
(in thousands)
                                         
    December 31,     September 30,     June 30,     March 31,     December 31,  
    2007     2007     2007     2007     2006  
    (unaudited)     (unaudited)     (unaudited)     (unaudited)     (audited)  
ASSETS
                                       
 
                                       
Current assets:
                                       
Cash and cash equivalents
  $ 290,206     $ 370,708     $ 444,020     $ 441,317     $ 461,618  
Short-term investments, at fair value
    101,602       217,845       160,315       134,610       87,575  
 
                             
Total cash, cash equivalents and short-term investments
    391,808       588,553       604,335       575,927       549,193  
 
                                       
Restricted cash
    6,977       3,142       3,136       3,128       3,124  
Accounts receivable, net
    166,953       130,216       120,680       125,756       115,304  
Other receivables
    4,330       5,000       6,845       9,888       2,556  
Inventories, net
    131,792       118,227       90,542       78,186       94,226  
Prepaids
    5,856       3,626       3,250       3,500       3,547  
Current deferred income tax assets
    44,939       19,602       23,239       26,818       29,285  
Other current assets
    4,841       13,703       10,773       4,001       3,717  
 
                             
Total current assets
    757,496       882,069       862,800       827,204       800,952  
 
                                       
Property, plant and equipment, net
    59,156       31,251       30,196       28,076       28,287  
Goodwill
    455,352       150,569       150,569       150,569       150,569  
Intangibles, net
    269,893       115       172       230       288  
Investments
    6,285       8,916       3,151       3,569       3,520  
Noncurrent deferred income tax assets
          16,238       17,294       18,639       20,874  
Other assets
    10,308       9,084       7,517       7,790       9,067  
 
                             
 
  $ 1,558,490     $ 1,098,242     $ 1,071,699     $ 1,036,077     $ 1,013,557  
 
                             
 
                                       
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                       
 
                                       
Current liabilities:
                                       
Accounts payable
  $ 58,852     $ 35,540     $ 46,015     $ 41,337     $ 60,853  
Accrued compensation, benefits and related taxes
    26,177       18,857       14,631       9,991       23,269  
Accrued warranty
    14,370       7,346       7,829       7,968       8,234  
Short-term debt and capital leases
    35,397                          
Other accrued liabilities
    50,503       27,127       28,001       32,411       29,057  
 
                             
Total current liabilities
    185,299       88,870       96,476       91,707       121,413  
Long-term debt and capital leases, net of current portion
    276,773       276,000       276,000       276,000       276,000  
Accrued pension
    10,455       11,810       12,778       12,420       12,061  
Noncurrent income tax payable
    5,686       5,262       4,334       4,334       3,041  
Noncurrent deferred income tax liabilities
    41,796                          
Other long-term liabilities
    12,714       5,143       5,288       5,606       5,621  
 
                             
 
    532,723       387,085       394,876       390,067       418,136  
 
                                       
Stockholders’ equity:
                                       
Preferred stock
                             
Common stock
    1,356       1,104       1,102       1,096       1,089  
Capital in excess of par value
    1,093,498       789,348       782,717       773,839       761,500  
Treasury stock
    (572 )                        
Unrealized gain (loss) on marketable securities
    20       (151 )           1,345       1,297  
Unfunded pension losses
    (3,358 )     (4,462 )     (4,462 )     (4,462 )     (4,462 )
Accumulated deficit
    (64,993 )     (74,498 )     (102,350 )     (125,624 )     (163,268 )
Unrealized loss on derivatives
                            (551 )
Cumulative translation adjustments
    (184 )     (184 )     (184 )     (184 )     (184 )
 
                             
Total stockholders’ equity
    1,025,767       711,157       676,823       646,010       595,421  
 
                             
 
  $ 1,558,490     $ 1,098,242     $ 1,071,699     $ 1,036,077     $ 1,013,557  
 
                             

 


 

ARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
                                 
    For the Three Months     For the Twelve Months  
    Ended December 31,     Ended December 31,  
    2007     2006     2007     2006  
    (Unaudited)     (Unaudited)     (Unaudited)     (Audited)  
Net sales
  $ 249,561     $ 234,571     $ 992,194     $ 891,551  
Cost of sales
    185,636       165,919       718,312       639,473  
 
                       
Gross margin
    63,925       68,652       273,882       252,078  
Gross margin %
    25.6 %     29.3 %     27.6 %     28.3 %
 
                               
Operating expenses:
                               
Selling, general, and administrative expenses
    25,471       22,680       99,879       87,203  
Research and development expenses
    17,549       15,580       71,233       66,040  
Restructuring and impairment charges
    39       1,863       460       2,210  
Acquired in-process research and development
    6,120             6,120        
Amortization of intangibles
    2,105       57       2,278       632  
 
                       
 
    51,284       40,180       179,970       156,085  
 
                       
Operating income
    12,641       28,472       93,912       95,993  
Other expense (income):
                               
Interest expense
    1,611       926       6,614       976  
Loss (gain) on investments and notes receivable
    282             (4,596 )     29  
Loss (gain) on foreign currency
    (16 )     (417 )     48       (1,360 )
Interest income
    (5,527 )     (4,817 )     (24,776 )     (11,174 )
Gain related to terminated acquisition, net of expenses
                (22,835 )      
Other (income) expense, net
    39       (1 )     370       268  
 
                       
Income from continuing operations before income taxes
    16,252       32,781       139,087       107,254  
Income tax expense (benefit)
    6,556       (37,374 )     40,951       (34,812 )
 
                       
Net income from continuing operations
    9,696       70,155       98,136       142,066  
Income (loss) from discontinued operations
    (126 )     97       204       221  
 
                       
Net income
  $ 9,570     $ 70,252     $ 98,340     $ 142,287  
 
                       
 
                               
Net income per common share — basic:
                               
Net income
  $ 0.08     $ 0.65     $ 0.89     $ 1.33  
 
                       
 
                               
Net income per common share — diluted:
                               
Net income
  $ 0.08     $ 0.64     $ 0.87     $ 1.30  
 
                       
 
                               
Weighted average common shares:
                               
Basic
    115,261       108,045       110,843       107,268  
 
                       
Diluted
    117,060       109,739       113,027       109,490  
 
                       

 


 

ARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
                                 
    For the Three Months     For the Twelve Months  
    Ended December 31,     Ended December 31,  
    2007     2006     2007     2006  
    (Unaudited)     (Unaudited)     (Unaudited)     (Audited)  
Operating Activities:
                               
Net income
  $ 9,570     $ 70,252     $ 98,340     $ 142,287  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                               
Depreciation
    2,849       2,552       10,852       9,787  
Amortization of intangibles
    2,105       57       2,278       632  
Stock compensation expense
    2,193       2,355       10,903       9,423  
Deferred income tax provision and income taxes payable
    901       (50,159 )     7,525       (50,159 )
Amortization of deferred finance fees
    280       139       1,116       139  
Provision for doubtful accounts
    (344 )     74       140       (174 )
Gain related to previously written off receivables
                (377 )     (1,573 )
Loss (gain) on disposal of fixed assets
    15       (59 )     182       (61 )
Gain on investments
    282             (4,596 )     32  
Gain on discontinued operations
    125       (97 )     (205 )     (221 )
Gain related to terminated acquisition, net of expenses
                (22,835 )      
Write-off of acquired in-process research and development
    6,120             6,120        
Changes in operating assets & liabilities, net of effects of acquisitions and disposals:
                               
Accounts receivable
    (1,963 )     5,362       (17,359 )     (32,153 )
Other receivables
    670       3,065       (1,774 )     (2,270 )
Inventory
    14,499       6,836       (9,502 )     19,683  
Accounts payable and accrued liabilities
    13,641       32,591       (10,744 )     50,200  
Excess tax benefits from stock-based compensation plans
    (888 )     (8,907 )     (9,157 )     (9,445 )
Prepaids and other, net
    2,779       952     2,517       8,114
 
                       
Net cash provided by operating activities
    52,834       65,013       63,424       144,241  
 
                               
Investing Activities:
                               
Purchases of property, plant, and equipment
    (3,934 )     (5,648 )     (15,072 )     (12,728 )
Cash proceeds from sale of property & equipment
          190       3       212  
Cash received related to terminated acquisition, net of expenses paid
                10,554        
Cash paid for hedge related to terminated acquisition
                (26,469 )      
Cash paid for acquisition, net of cash acquired
    (318,875 )           (318,875 )      
Cash proceeds from hedge related to terminated acquisition
                38,750        
Purchases of available-for-sale securities
    (60,740 )     (77,575 )     (356,366 )     (129,475 )
Disposals of available-for-sale securities
    249,315       20,000       412,217       96,150  
 
                       
Net cash used in investing activities
    (134,234 )     (63,033 )     (255,258 )     (45,841 )
 
                               
Financing Activities:
                               
Payment of debt and capital lease obligations
    (19 )           (19 )      
Issuance costs related to stock
    (653 )           (653 )      
Proceeds from issuance of debt
          276,000             276,000  
Deferred financing costs paid
          (7,760 )           (7,760 )
Excess tax benefits from stock-based compensation plans
    888       8,907       9,157       9,445  
Employer repurchase of shares to satisfy minimum tax withholdings
    (1 )           (3,093 )     (2,019 )
Proceeds from issuance of stock and other
    683       2,520       15,030       12,266  
 
                       
Net cash provided by financing activities
    898       279,667       20,422       287,932  
Net increase (decrease) in cash and cash equivalents
    (80,502 )     281,647       (171,412 )     386,332  
Cash and cash equivalents at beginning of period
    370,708       179,971       461,618       75,286  
 
                       
Cash and cash equivalents at end of period
  $ 290,206     $ 461,618     $ 290,206     $ 461,618  
 
                       

 


 

ARRIS GROUP, INC.
Supplemental Net Income Reconciliation (unaudited)
Q1 EPS 2008 Guidance
         
Estimated GAAP EPS
    $ 0.00 - $ 0.04   
Reconciling Items
     
Amortization of Intangibles
    0.06  
Stock Compensation Expense
    0.01  
Integration Costs
    0.01  
 
     
Subtotal
    $ 0.08  
 
     
Estimated Non GAAP EPS
    $ 0.08 - $ 0.12  
 
     
See the GAAP to Non-GAAP EPS reconciliation for a discussion regarding management’s reasoning for providing this non-GAAP financial measure


 

ARRIS GROUP, INC.
SUPPLEMENTAL NET INCOME RECONCILIATION
(in thousands, except per share data)
(unaudited)
                                                                                 
    Q1 2007     Q2 2007     Q3 2007     Q4 2007     YTD 2007  
            Per Diluted             Per Diluted             Per Diluted             Per Diluted             Per Diluted  
    Amount     Share     Amount     Share     Amount     Share     Amount     Share     Amount     Share  
Net income
  $ 37,644     $ 0.34     $ 23,274     $ 0.21     $ 27,852     $ 0.25     $ 9,570     $ 0.08     $ 98,340     $ 0.87  
 
                                                                               
Highlighted items:
                                                                               
Impacting gross margin:
                                                                               
Stock compensation expense
    165             229             196             195             785       0.01  
Write-off discontinued inventory
                                        1,046       0.01       1,046       0.01  
 
                                                                               
Impacting operating expenses:
                                                                               
Gains related to previously written off receivables
    (377 )                                               (377 )      
Write-off of in-process research and development
                                                    6,120       0.05       6,120       0.05  
Acquisition Costs
                                                    1,415       0.01       1,415       0.01  
Amortization of intangibles
    58             58             57             2,105       0.02       2,278       0.02  
Stock compensation expense
    2,491       0.02       3,149       0.03       2,480       0.02       1,998       0.02       10,118       0.09  
 
                                                                               
Impacting net income (loss) from continuing operations:
                                                                               
Gains related to terminated acquisition, net of expenses
    (22,835 )     (0.21 )                                         (22,835 )     (0.20 )
Gain on investment
                (1,345 )     (0.01 )     (3,519 )     (0.03 )                 (4,864 )     (0.04 )
 
                                                                               
Impacting discontinued operations:
                                                                               
Gains related to previously written off receivables
                            (330 )                       (330 )      
 
                                                                               
Impacting income tax expense:
                                                                               
Adjustments of income tax valuation allowances and research & development credits and other
    (3,246 )     (0.03 )                 (3,466 )     (0.03 )     (1,247 )     (0.01 )     (7,959 )     (0.07 )
 
                                                                               
Tax related to highlighted items above
    7,754       0.07       (670 )     (0.01 )     423             (2,373 )     (0.02 )     5,134       0.05  
 
                                                           
Total highlighted items
    (15,990 )     (0.14 )     1,421       0.01       (4,159 )     (0.04 )     9,259       0.08       (9,469 )     (0.08 )
 
                                                           
Net income excluding highlighted items
  $ 21,654     $ 0.20     $ 24,695     $ 0.22     $ 23,693     $ 0.21     $ 18,829     $ 0.16     $ 88,871     $ 0.79  
 
                                                           
 
                                                                               
Weighted average common shares — diluted
            110,988               111,698               112,085               117,060               113,027  
 
                                                                     
                                                                                 
    Q1 2006     Q2 2006     Q3 2006     Q4 2006     YTD 2006  
            Per Diluted             Per Diluted             Per Diluted             Per Diluted             Per Diluted  
    Amount     Share     Amount     Share     Amount     Share     Amount     Share     Amount     Share  
Net income
  $ 20,723     $ 0.19     $ 24,750     $ 0.23     $ 26,562     $ 0.24     $ 70,252     $ 0.64     $ 142,287     $ 1.30  
 
                                                                               
Highlighted items:
                                                                               
Impacting gross margin:
                                                                               
Stock compensation expense
    108             112             144             142             506        
Impacting operating expenses:
                                                                               
Gains related to previously written off receivables
    (475 )           (1,098 )     (0.01 )                             (1,573 )     (0.01 )
Restructuring charges — adjustments to existing accruals
    328             15             4             1,863       0.02       2,210       0.02  
Amortization of intangibles
    218             219             138             58             633       0.01  
Stock compensation expense
    2,140       0.02       2,281       0.02       2,283       0.02       2,213       0.02       8,917       0.08  
 
                                                                               
Impacting discontinued operations:
                                                                               
Restructuring charges — adjustments to existing accruals
    (21 )           (88 )           (15 )           (97 )           (221 )      
 
                                                                               
Impacting net income (loss) from continuing operations:
                                                                               
Adjustments of income tax valuation allowances and research & development credits
                                        (38,791 )     (0.35 )     (38,791 )     (0.35 )
 
                                                                               
 
                                                           
Total highlighted items
    2,298       0.02       1,441       0.01       2,554       0.02       (34,612 )     (0.32 )     (28,319 )     (0.26 )
 
                                                           
Net income excluding highlighted items
  $ 23,021     $ 0.21     $ 26,191     $ 0.24     $ 29,116     $ 0.27     $ 35,640     $ 0.32     $ 113,968     $ 1.04  
 
                                                           
 
                                                                               
Weighted average common shares — diluted
            109,345               109,670               109,090               109,739               109,490  
 
                                                                     
ARRIS believes that presenting net income and related per share amounts adjusted for the items detailed above provides meaningful information that will allow investors to more easily understand ARRIS’ financial performance and compare its period-to-period results. 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. In prior periods, ARRIS highlighted significant losses related to bad debt expense associated with certain customers. ARRIS recognized gains in Q1 of 2006 and 2007 and then again in Q3 of 2007 associated with these previously written off receivables. During the 4th quarter of 2007 ARRIS completed the C-COR acquisition. Due to the acquisition we acquired in process research and development of $6.2 million which was written off during the 4th quarter. With respect to amortization of intangibles, the intangibles being amortized relate to our recent acquisition of C-COR. The $0.9 and $0.1 million relate to inventory of a product line that management decided to discontinue. The restructuring charge and discontinued operations adjustments 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. In the second quarter of 2007, ARRIS realized a gain before tax of $1.3 million on its deferred compensation asset that had been previously recorded as an unrealized gain on the balance sheet. During the third quarter of 2007, ARRIS bought and sold investments and realized a gain of $3.5 million. In the third quarter of 2007, a tax benefit of approximately $3.5 million was recorded for a reversal of valuation allowances and research and development tax credits related to a tax credit study that was undertaken for prior years (2001 — 2006). During the first quarter of 2007, ARRIS announced that it entered into a transaction agreement with TANDBERG Television ASA, in which ARRIS was to buy all the outstanding shares of TANDBERG. ARRIS was subsequently outbid by another buyer and the transaction agreement was terminated during the first quarter 2007. ARRIS recorded gains, net before tax, of $22.8 million related to the termination of the transaction (termination fee, foreign exchange gains, and expenses). The net termination fee resulted in a capital gain which provided greater access to prior tax capital losses that had previously been viewed as more likely than not unrealizable. As a result, net income tax valuation allowances totaling $3.2 million were reversed in the first quarter 2007. During the fourth quarter 2007, ARRIS recorded severance costs of approximately $0.5 million related to a reduction in the legacy ARRIS workforce. The workforce reduction was due to an overlap of personnel following the C-COR acquisition. Also during the fourth quarter 2007, ARRIS recorded incremental costs of $0.9 million as a result of the C-COR acquisition. Lastly, during the fourth quarter of 2006, ARRIS reduced a large portion of the valuation allowances related to deferred income tax assets, based on current judgment that the benefits will be realized, and recorded a tax benefit related to research and development credits for the periods 2001 — 2006.
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 expects to continue providing similar information in the future with schedules reconciling the differences between GAAP and non-GAAP financial measures.