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Analysts

Noah Kirschbaum Garrett Moreland

noah-kirschbaum@uiowa.edu garrett-moreland@uiowa.edu

Nick Sulentic Ryan Wettengel

nicholas-j-sulentic@uiowa.edu ryan-wettengel@uiowa.edu

12 Month Stock Performance

Source: Yahoo Finance

Company Overview

Arris Group, Inc. (NASDAQ:ARRS) is a global

communications technology company that primarily

serves cable systems and multiple systems operators.

Arris Group’s two product segments are Network &

Cloud (CMTS, Video Infrastructure, Access &

Transport, Cloud Services and Global Services) and

CPE (Digital Video, DOCSIS Devices, and Telecom

CPE).

Stock Performance Highlights

52 week High $37.50

52 week Low $24.46

Beta 1.3588

Share Highlights

Market Capitalization $4.161 B

Shares Outstanding 146.7 M

2015 EPS $1.96

P/E Ratio 25.54

2015 Dividend Yield N/A

Financial Ratios

Debt to Equity Ratio 53.00%

Current Ratio 1.61

Return on Equity 12.13%

Gross Margin 26.78%

Key Investment Information

Arris Group’s acquisition of Pace plc likely to be

approved, and the acquisition is projected to be

accretive within the first year. Strong expectations

for revenue synergies, manufacturing

consolidation and component cost reduction

Introduction of new products and services should

add to the diversification and breadth of offerings

of Arris. This increased diversification will

reduce the amount of risk Arris is exposed to

overall. Arris will have the opportunity to market

these new products to their current customers and

doing so will help drive their performance.

Strong and growing demand for wireless network

solutions will provide Arris an opportunity for

growth. Especially within the IP video space

where over 75% of total wireless network traffic

is expected to be accounted for by video

streaming due to increased prominence of over-

the-top providers and increased opportunity for

video consumption through social media

platforms.

A growing middle classes in emerging economies

such as India and China indicates also favorable

growth prospects for Arris Group.

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Krause Fund Research | Fall 2015 Technology

Arris Group (NASDAQ: ARRS)

November 17, 2015

Action: BUY

Current Price: $ 28.61

Target Price: $ 44.87

Page | 2

We are initiating our coverage of Arris Group Inc.

with a BUY rating. Arris was a leading provider

of set-top boxes worldwide in 2013. However,

since that time the technology has seen a

maturation in its life cycle and thus has begun to

be phased out, leading to declining sales to the

dismay of Arris.

Arris Group has been proactive in finding new

product lines and diversifying their reach. In

April of this year they completed a joint venture

acquisition of ActiveVideo Networks and

initiated their entry into the satellite TV space.

Another acquisition in the making is with Pace

Plc. Pace would supplement their revenue by $8

billion and expand their global workforce to 8500

people. We are optimistic about the synergies

provided by each of these acquisitions, and

believe that they will add a lot of value and hence

is another reason as to why we are initiating a

BUY rating in cohesion with the optimistic

intrinsic stock price of $ 44.87 we have derived.

Real Gross Domestic Product (GDP)

Real Gross Domestic Product (GDP) is a broad

indicator of economic activity that measures the

total market value of goods and services

produced within a given country, after adjusting

for inflation. Real GDP provides a

comprehensive overview and indication of the

overall health of an economy. Strong economic

activity is largely driven by consumer

expenditures and corporate expansions, making

Real GDP an important economic variable that

drives activity in the Technology Sector.

In Quarter 2 of 2015, Real GDP increased by

2.71%, beating analyst predictions.12 The Real

GDP growth has given the US economy

momentum during the recent market turbulence.

Financial market turbulence at the end of Q2

2015 into the beginning of Q3 2015 caused a

decline in Real GDP growth, registering at 2.02%

in Q3 2015. The potential for interest rates hikes

in Q4 2015 could result in a further decrease in

consumption and investment as a result of the

increased cost for borrowing. We believe the

volatility in capital markets was driven by the

uncertainty surrounding rising interest rates. If

interest rates rise, we see the capital markets

stabilizing and returning to growth, which will

coincide with growing Real GDP. We predict the

short-term Real GDP growth to be around 2.25%

in 2016. In the longer 2-3 year time horizon, we

forecast Real GDP growth increasing to 2.5% as

the capital markets return to steady growth.

Source: Federal Reserve Economic Data3

Consumer Confidence / Consumer Sentiment

Source: Bloomberg Data

Consumer confidence is an economic measure

that analyzes the degree of optimism that the

people of the United States hold towards their

own personal financial positions and the health of

the overall economy. Consumer confidence

affects the way in which people react to certain

economic situations such as spending and

borrowing. It is a very important factor affecting

corporate profitability, which drives business

capital spending. As the economy expands and

grows, as it has since the financial crisis of 2008,

we often see an increase in consumer confidence

and the opposite is true during times of economic

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Consumer Confidence Index (CCI)

EXECUTIVE SUMMARY

ECONOMIC OUTLOOK

Page | 3

pull back. There are many ways in which

consumer confidence is documented and

analyzed including the Consumer Confidence

Index (CCI), the University of Michigan

Consumer Sentiment Index (MCSI), the

Bloomberg Consumer Comfort Index, the

Consumer Confidence Average Index, and the

Gallup Economic Confidence Index.

CCI data is collected and reported on a monthly

basis, and is considered a lagging indicator of

economic health, which responds only after the

economy has already changed. Opinions on

current conditions make up 40% of the index,

with expectations of future conditions comprising

the remaining 60% of the overall index. The CCI

hit its lowest point in February 2009, when its

rating touched as low as 25.3. From 2009 and on,

the Index has seen an upward trend and it reached

the 100 level for the first time in January 2015

since it last achieved similar levels in September

2007. The CCI increased moderately in

September 2015, but has since declined in

October. The index now stands at 97.6, down

from 102.6 in September. Although the index saw

a decline in the last month, consumers still rate

the current market conditions favorably, but for

the most part do not anticipate the economy

strengthening much in the near term. A less then

positive assessment of the job market and other

present-day conditions are relevant reasons for

this decline in confidence among consumers.

Strong consumer confidence is very important for

Arris Group and the sale of their products. As the

U.S. economy continues to develop and real GDP

growth becomes increasingly steady we believe

that consumer confidence will also stabilize. We

predict that the index will hover around 96 points

moving into 2017.

30 Year Treasury Yields

Source: Bloomberg Data

Treasury yields are the return on investment on

the U.S. government’s debt obligations (bonds,

notes, and bills). The higher the yields are for the

10, 20, and 30 year Treasuries, the better the

economic outlook. Treasuries are considered a

very low-risk investment because they are backed

by the full faith and credit by the U.S.

government. 4 Under normal circumstances,

Treasuries with longer maturities often have a

higher yield than shorter-term Treasury securities.

Treasury yields increase when the Federal

Reserve increases its target for the federal funds

rate, or when investors expect that the federal

funds rate will increase. When the demand for

Treasury bonds decreases, Treasury yields

increase. Treasury yields have a significant

impact on the way in which firms choose to set

up their capital structures and as the Treasury

yields rise, firms are expected to produce higher

rates of return relative to the increase seen in the

Treasury yields. Treasury yields are used to

derive the cost of equity for the firm which then

is used as one of the components needed to derive

the weighted average cost of capital (WACC) for

the individual firm. The WACC that is calculated

for the individual firm is then used in the

discounted cash flow analysis (DCF), as the

discounting factor. In the assumptions that we

used to derive our intrinsic stock price using a

DCF analysis, we used the current 30-Year

Treasury bond yield of 3.06% to calculate Arris’

cost of equity.

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30 Year Treasury Bond Yields

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Currency Exchange Rates

Source: Bloomberg Data

Exchange rates represent the value of one

currency against that of another currency. The

trade-weighted US dollar index is a measure of

the value of the United States dollar relative to

other world currencies and it includes a larger

collection of currencies compared to the US

dollar index. Its numerical value is determined as

a weighted average of the price of various

currencies relative to the dollar. For large

multinational companies, like Arris, exchange

rates can impact a company's profit and its ability

to transfer money between countries. The dollar

approached a seven-month peak on November 16,

2015, as hedge funds increased wagers the

currency will strengthen amid speculation that the

Federal Reserve will raise interest rates as soon

as December 2015. 5 The Trade Weighted US

Dollar Index has climbed 13.39% YOY as of

November 16, 2015.6 The strengthening of the

dollar will hurt US based tech companies’ ability

to sell their hardware and software overseas. As

global economies recover, we will look for the

dollar to stabilize relative to other currencies by

2018.

Capital Markets Outlook

The outlook of the NASDAQ is tied closely with

the Technology Sector. Analyzing the NASDAQ

will serve as a useful reference point for the

performance of the Technology Sector as a whole.

In August of 2015, the NASDAQ saw a

significant downturn, which indicates that the

rapid growth seen in the Technology Sector

earlier in 2015 may slow to more conservative

levels in the near future. We believe that the

market turbulence seen since August has been

caused by the uncertainty around the potential of

a rise in interest rates in Quarter 4 of 2015. With

a strong US Jobs report in October, the likelihood

of an interest rate rise has increased significantly.

According to fed fund futures contracts, the

market believes that there is a 70% chance of the

Fed hiking rates in December 2015. 7

3Q15 Sales Revisions

Source: FactSet, BofA Merrill Lynch

As Quarter 3 earnings have been released, most

sectors have seen negative revenue revisions as

more information has been gathered. The

Technology Sector, however, outperformed all

others with 0% change after revisions. 8 This

indicates the Technology Sector will continue to

perform well during times of uncertainty

compared to that of the S&P 500 and other sectors.

We conclude that the Fed will raise rates by the

end of 2015 and this will cause the US capital

markets to stabilize. In the short-term, we believe

the capital markets will return to positive growth,

but at more conservative levels that have been

seen in the last year. The strength of Quarter 3

earnings in the Technology Sector leads us to

believe that there will be higher growth in

Technology companies in the near and long-term.

Overview

Arris group is leading provider of broadband

consumer premises equipment. Arris cemented

their position as a leading provider of set-top

boxes through their acquisition of Motorola

Home in April 2013. Arris is again looking to

expand through their acquisition of Pace Plc

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US Trade Weighted US Dollar

INDUSTRY ANALYSIS

Page | 5

(London, UK) in order to further their position in

the set-top box market. The combined entity will

provide 70 to 80 percent of the U.S. cable

industries’ set-top boxes.

Key Industry Trends

Increasingly Competitive Environment: There

are approximately 38 competitors in the set-top

box market alone. Many of those 38 have a

strong international presence, diversified product

lines, and an established brand identity. Nearly

all of these 38, including Cisco, Huawei, and

Juniper have cloud computing businesses in

addition, similar to Arris Group.

Further perpetuating a competitive industry is

easy access to capital, especially in the form of

debt given the low interest rate environment, but

also through venture capital which allows quick

access to public markets and quick expansion

into foreign markets. This easy access to capital

makes for low barriers to entry in the CPE

industry.

Foreign Markets: IT spending in emerging

markets is expected to increase at a rate of

7.1%9, which is five times as much as developed

markets.

China: IT spending (indicator of growth) is

expected to grow at a rate of five percent after

being dragged on by the slowing PC,

smartphone, and tablet markets.

India: IT spending in India grew 9.7% in

2014 and is expected to be one of the largest

growing markets for technology companies

in the next decade due to the rapidly growing

middle class.

Network Traffic and IP Video: The increased

prominence of video streaming through sites like

Netflix, Hulu, and HBO Go in tandem with

increasing popularity of social media sites that

make videos easily accessible and the increased

convenience of watching videos has resulted in

an exponential increase in the transportation of

video over the Internet Protocol (IP) layer. Due to

the amount of bandwidth video IP requires,

further increases have potential to strain networks.

This additional strain will cause providers to pay

more attention to network latency and quality of

service as a method of differentiation. Video

traffic in wired and wireless media is expected to

account for 75.6% of all video traffic by 2018.

Global IP traffic increased fivefold over the last

five years and is expected to increase threefold

over the next five.

Source: Cisco

As the graph above depicts, wireless video is

expected to increase at a far greater rate than any

other uses of data traffic. This growth signifies a

great opportunity for Arris to capture contracts

with the telecom and broadband providers as they

attempt to supply this growing demand in a

quality fashion since Arris’ products are the

tangible touch point between consumers and the

providers.

Catalysts for Growth/Change

One significant catalyst for growth going forward

will be the increased pressure on margins for

consumer premises equipment companies. As

was previously mentioned, the increased amount

of competition in the set-top box market causes

investors to seek drivers of value beyond a sound

business idea. One of these drivers comes in the

form of gross margins and operating margins. All

else equal, companies that are able to retain more

of their revenues and create profits are more

valuable. Also driving the increased pressures to

deliver solid margins is the lack of differentiation

between products. In the CPE market, not many

different features are discernable between

equipment. This also causes companies to be

more valuable based on their ability to deliver

solid margins rather than on their products or

business ideas.

Page | 6

A second catalyst for change is the increased

prominence of over-the-top providers of video

such as Netflix. These providers not only create

additional competition for set-top manufacturers

but also incentivize consumers to ditch their set-

top boxes completely, since having each may

become redundant. As more and more over-the-

top providers attempt to sway consumers to cut

their cord, we expect that the set-top box market

will become increasingly difficult to operate in.

Key Investment Positives and Negatives

Positives: There are a number of positive trends

that would indicate favorable growth prospects in

the PCE industry. The first being easy access to

capital for companies expanding rapidly. These

high growth companies also will have easy access

to foreign markets that only further increase their

probability of producing higher revenues and

higher growth.

We also believe that the vastly increasing demand

for network bandwidth to support IP video will

drive new revenue streams for companies able to

innovate and provide new network solutions to

accommodate the large amount of new traffic

over IP. Additionally, companies that currently

have relationships with carriers are likely to be

more responsive to their ever-changing needs and

will allow them to develop new solutions in a

quicker and more effective manner.

Negatives: Increased pressure on margins from

new competitors allowed to enter the industry

riding on cheap debt and access to foreign

markets will inevitably make operating in the

industry even more difficult. This pressure on

margins will likely send some PCE

manufacturers out of business unless they are

able to cut their costs to the point of profitability.

High debt levels in the industry will cause

extremely high interest payments down the road

once the Federal Reserve does decide to raise the

target for the federal funds rate. These additional

payments on debt will cause companies without

the cash balances to make these payments to

default.

Overview

Arris Group (ARRS) is a global communications

technology company that primarily serves cable

systems and multiple systems operators. Arris

Group’s two product segments are Network &

Cloud (CMTS, Video Infrastructure, Access &

Transport, Cloud Services and Global Services)

and CPE (Digital Video, DOCSIS Devices, and

Telecom CPE).

Life Cycle

Arris Group, Inc. currently operates in the

Growth phase of their life cycle. Despite having

been in operation since 1969, the company has

yet to realize sales stability. Arris Group has

taken substantial measures to expand its market

presence and remain competitive amongst

multiple industry competitors who are in the

Stable phase of their life cycles. Arris Group is

driving growth through strategic acquisitions and

continued release of innovative products/services.

Financial Summary

Arris Group achieved net sales of $5.323 billion

in 2014, compared with sales of $3.621 billion in

2013. The considerable increase in sales was

largely the result of the acquisition of Motorolla

Home Business in 2013. Arris Group has

experienced lower sales in the nine months ended

September 30, 2015, as compared to the same

period in 2014. Company management expects

sales and earnings to be down year over year in

FY2015, driven by short-term industry

challenges and the global economic slowdown.

Despite weakness in 2015, we predict the joint

venture completed with ActiveVideo Networks,

Inc. and the anticipated acquisition of Pace plc

will provide opportunities for growth in 2016.

COMPANY ANALYSIS

Page | 7

Segment Data

Business Segments

Arris Group, Inc. operates through two primary

business segments, categorized based on the

nature of the products and services.

Source: Income Statement, (10-K 2014)

Consumer Premises Equipment: This business

segment refers to the revenues associated with

equipment located at the premises of subscribers,

such as set-top boxes, gateways and routers. The

equipment in this category provides

communications service providers the ability to

distribute their Voice, Video and high-speed data

services to residential or business subscribers via

a local area network.

Arris Group is leader in the supply of all types of

broadband CPE equipment10, offering an array of

innovative products that support different service

providers’ service distribution needs.

Network & Cloud: This business segment refers

to the revenues associated with equipment used

in the construction of residential and metropolitan

distribution networks by facility-based Service

Providers11, such as video management, storage,

and distribution equipment, and fiber-based and

copper-based broadband transmission equipment.

New Products: As discussed earlier, Arris Group

is in the growth phase of the business life cycle;

in order to increase its competitiveness, Arris

Group must continually introduce new products,

especially in the technology sector. Arris Group

recently unveiled three new products that are of

particular importance to strengthening the firm’s

competitive advantages: the Triple Play

Residential Gateway, a Modular Uplink Solution,

and a Broadcast Network Controller. These

products are intended to replace the firm’s legacy

CPE products with advanced equipment that

provide greater capabilities to satisfy growing

consumer appetite for higher-speed networking

services and greater bandwidth.

Analysis of Recent Earnings Releases &

Managerial Guidance

Arris Group’s third quarter 2015 earnings release

reported earnings per share (EPS) for the nine

months ended September 30, 2015 at $0.43. This

is a substantial decline from a level of $0.93 the

prior year. This is due to significantly weaker net

income through Q3 2015 compared to the same

time period one year prior; net income was

approximately $72.3 million less through the first

three quarters of 2015 than the same period in

2014. The outstanding shares figure increased by

approximately two million shares, causing further

decay to the EPS data.

Negative earnings data largely contributed to

decline in EPS data year to date, but other factors

contributed. The change in EPS also resulted

from the completion of a joint venture in April

2015 when Arris Group partnered with

ActiveVideo Networks, Inc. Another change will

occur when Arris Group complete the acquisition

of Pace plc at the end of 2015 or early 2016. The

joint venture and anticipated acquisition are

expected to create significant synergies and

enhance the combined entity’s product offerings.

The acquisition of Pace plc will also initiate Arris

Group’s entry into the satellite segment. We

believe the aforementioned transactions make

Arris Group a strong candidate for future growth.

Production and Distribution

Arris Group strives to find the optimal balance

between internal and external manufacturing in

Page | 8

order to remain competitive in quantity and cost,

as well as maintain flexibility to meet customer

demands. Their internal manufacturing facilities

are located in Taipei, Taiwan and Tijuana,

Mexico. Their contracted manufacturers are then

located in China, Israel, Thailand, Mexico, and

the United States. The most significant portion of

set-top boxes are manufactured in Taipei. Other

products produced there include modems, DTAs,

and internet protocol set-tops. A portion of their

Network & Cloud products are manufactured in

Tijuana. Current contracts provide amplifiers,

power supplies, accessories, optical modules,

digital return modules, circuit boards, repair

services, and video infrastructure equipment. Due

to the high level of manufacturing in countries

outside the United States, we believe that Arris

Group is exposed to a high degree of currency

exchange rate risk. Despite the apparent risk,

Arris Group has taken steps to mitigate the risk

associated with volatile currency exchange rates,

specifically entering into various foreign

currency contracts12.

Distribution takes place on a broad scale, both in

terms of products and geographies. Domestically,

hardware and installation products are distributed

through regional warehouses in California, North

Carolina and Washington. Internationally, Arris

Group distributes through warehouses at the

regional level in Canada, Japan, Germany and the

Netherlands. Drop shipments are also used for

contract manufacturers abroad.

Key components to be used in manufacturing are

obtained through multiple third-party suppliers.

Supply agreements include technology licensing

and component purchase contracts. Arris Group

licenses software for network and security

systems, and a variety of routing protocols from

different suppliers. Arris Group appears to be

well diversified at both the supplier and

distributor level, and we believe that this helps to

reduce inventory risk, as well as maintain

flexibility in accordance with customer demand13.

Competition

Arris Group operates in a highly competitive

industry that is characterized by a concentration

of select equipment providers and rapid

consolidation. In the communications equipment

industry, Arris Group specifically focuses on

radio station, wireless networking, and broadcast

equipment. The companies listed in the chart

below represent Arris Group’s direct competition

within the communications equipment industry.

Ticker Mkt Cap

(B) P/E

(TTM) Rev (B)

EPS (TTM)

ARRS 4.16 13.9 5.32 1.75

JNPR 11.27 23.15 4.63 -0.68

NTGR 1.36 24.3 1.39 -0.35

PLT 1.76 22.34 0.87 2.44

CSCO 136.28 14.35 49.16 1.89

COMM 5.05 21.8 3.83 0.28

CIEN 3.26 N.A. 2.29 -0.08 Source: data from Bloomberg

We arrived at the list of relevant competition

above by applying filters based on market cap,

P/E ratio, and revenue. Despite the large

difference in size, we felt it was appropriate to

include Cisco in the discussion of competition

given they are consistently Arris Group’s closest

competitor. Arris Group, in terms of financial

health and relative valuation, is in line with

industry competitors and exhibiting operational

strength as evidenced by the table above.

Research and Development

The Technology Sector is a highly competitive

environment characterized by continuous change

and rapid advancement. Innovation is key for

Arris Group to obtain and hold a leadership

position within its respective industries as

products grow obsolete quickly and industry

trends evolve rapidly. R&D expenditures are

crucial for Arris Group’s continued success.

Arris Group’s total R&D expenses for 2013 and

2014 were $425.8 million and $556.6 million,

respectively. As a percentage of sales, R&D

expenses have remained stable, sitting at 10.5%

of sales in 2014 14 . Arris Group’s consistently

strong focus on R&D has been an integral part of

their recent success. We are projecting a

sustained focus on R&D from Arris Group going

forward, leading to more successful innovations.

Page | 9

Catalysts for Growth/Change

In the current market, we are seeing that key

drivers of growth are tied to broadband, cloud

computing, data networking and data security.

The transition to online streaming by consumers

will require Arris Group and companies alike to

alter their businesses model. The proliferation of

smartphones and tablets has dramatically

increased the demand placed on mobile networks.

In accordance with changes in consumer behavior

and data consumption, service providers have

reduced spending on wireline network capacity.

Service providers have shifted investment

spending toward developing wireless networks15.

Arris Group currently relies on a considerable

portion of its revenues to be provided by sales of

wireline network equipment. Despite this fact,

Arris Group has taken major steps to develop new

products for wireless networks, and is slowly

reducing its wireline dependency.

Strong performance in the Network & Cloud

business drove most of the quarter-over-quarter

growth for Arris in Q2 2015. We look to this

segment to be the primary growth driver in the

long term. The Cloud Services industry has seen

steady growth as consumers look for greater

flexibility in the way they manage and store data.

Network & Cloud sales in Q2 2015 was $422

million, up $29 million (7%) from Q1 2015, and

up $12 million (3%) as compared to Q2 2014.16

These figures reveal the significant uptrend in

Network & Cloud service demand, and we

estimate that this service will continue increasing

as a percentage of Arris Group’s total revenue in

the future. Arris Group successfully launched the

next version of the XG1 cloud and ramped up

production for this product in Q2 2015. We look

to this launch as being influential to their cloud

based initiatives moving forward.

Key Investment Positives and Negatives

Positives: Arris Group is currently in the process

of acquiring Pace plc for $2.1 billion, and they

expect the deal to close by the end of 2015. Pace

plc develops technologies and products for Pay

TV and broadband service providers. In the

summer of 2013, Arris Group acquired the

Motorola Home Business for $2.35 billion. The

acquisition has been successful in increasing

shareholder value, largely driven by significant

revenue and cost synergies. As a result, we are

confident the merger between Arris Group and

Pace plc will be successful too.

When the deal between Arris Group and

Motorola Home Business closed, Arris Group

was trading at 8.0x FY2 estimates of EPS. Arris

Group subsequently saw it EPS multiple increase

to 12.0x-13.0x over the next twelve months. We

expect to see a similar expansion of trading

multiples when the Pace plc deal closes and

synergies are realized.

Arris is also trading at a P/E ratio of 13.9,

significantly lower than the average P/E ratio for

the Communications Equipment industry which

is at 24.817. We believe Arris Group is currently

undervalued relative to its peers, and this belief is

reinforced when looking at the overall

performance and financial health of the firm.

Arris Group announced the deployment of its

TG1682 DOCSIS 3.0 gateway at Comcast in

September, 2015. The TG1682 is part of

Comcast’s newly created XB3 service that will

enable gigabit wireless speeds, IP video

technology, and integrated home automation and

security capabilities to subscribers of the

service.18 The TG1682 has open-source software

that will allow for a new version of the RDK

(Reference Design Kit) that is still being

developed by the larger RDK community. This

collaboration between Arris Group and Comcast

proves Arris Group’s overall relevance in the

Communication Equipment industry and its

dedication to providing subscribers with

exceptional broadband devices.

Negatives: The increase in the strength of the U.S.

Dollar has raised a potential point of weakness for

Arris Group moving forward. A majority of Arris

Group’s international sales are denominated in a

foreign currency. As a result of the recent

appreciation of the U.S. dollar, international sales

have been negatively impacted, as the value of

sales in a foreign currency is increasingly worth

less.19

Over-The-Top content (OTT) refers to the

delivery of audio, video, and other media over the

Internet without the involvement of a multiple-

Page | 10

system operator in control of the distribution of

content. Over-The-Top content has gained

popularity recently and many claim it is a large

threat to the set-top box. The set-top box is one of

Arris Group’s products that has largely

influenced the success of Arris Group so far. A

set-top box (STB) is an information appliance

device that usually contains a TV-tuner input and

displays outputs to a television set and an external

source of signal, turning the source signal into

content in a form that can then be displayed on

the television screen or other display device.

They are used in cable television, satellite

television, and over-the-air television systems.20

We expect that U.S. multichannel pay TV

subscribers will remain mostly the same for the

coming years, achieving around 110K

subscribers in 2018. We do not expect OTT to put

an end to STB’s for the foreseeable future even

though there has been a trend in growth of OTT

in the last couple of years.

The last potential concern is that regulatory

decisions may potentially put an end to the

merger of Arris and Pace. If the merger is

completed, Arris will effectively control 25% of

the overall global market. 21 Regulators are

focusing more on the STB market, and we believe

if they expand their focus and consider the

broader video infrastructure market they would

see that indeed there would still be plenty of fair

competition being exercised within this industry

segment.

Key Assumptions

Revenue Decomposition; Arris Group’s revenue

is broken down into two segments: Consumer

Premises Equipment and Network & Cloud. We

expect total revenue to grow at 0.72% in 2015,

down from 119.36% revenue growth in 2014. In

the years following 2015, we expect revenue to

grow at an average rate of 0.35% over a five year

forecast horizon. We forecasted 2015’s total

revenue based on Arris Group’s expectations for

revenue the first year following the completion of

the Pace plc acquisition. To forecast the

subsequent years, we broke down total revenue

into the two product segments and projected

revenue growth based historical performance and

expected future trends that were significantly

changing the industry.

Cost of Goods Sold: We calculated the first Cost

of Goods Sold forecast as a percentage of sales,

based on a historical average. For the remainder

of the near-term forecasts, we reduced the

percentage of sales to account for expected cost

synergies after the acquisition of Pace plc.

Discounted Cash Flow and Economic Profit

Models

The Discounted Cash Flow and Economic Profit

models both produced an unadjusted intrinsic

share price of $41.45. After adjusting the value to

reflect the percentage of 2015 that has already

elapsed, we arrived at an adjusted, current day

share price of $44.87. This value is $16.26 higher

than the Arris Group’s current market share price

of $28.61. Arris Group has demonstrated strength,

resiliency, and its innovative capabilities over the

past decade. In particular, we believe the strategic

acquisitions made and joint ventures finalized in

the past five years have been incredibly

successful by way of boosting revenues

dramatically, expanding product and service

offerings through R&D or acquisition, and

diversification of the customer base. We believe

the Pace plc acquisition will produce similar

outcomes, and as a result, we feel confident about

the $44.87 share price.

Dividend Discount Model

Arris Group does not currently have a dividend

distribution policy in place. Arris Group is in the

Growth stage of its business life cycle, and they

have elected to utilize the cash holding for fund

expansionary efforts. The DDM model produced

an intrinsic share value of $42.35, $13.74 higher

than the current share price today of $28.61. The

share price derived from our DDM model was

slightly lower than the value produced by our EP

and DCF models. Despite a slight difference,

both share prices reflect approximately the range

for which we believe is an appropriate valuation

for Arris Group.

VALUATION

Page | 11

Relative Valuation

We performed a relative valuation analysis using

the P/E ratio. The 12-month forward looking P/E

ratio calculation produced an intrinsic share price

of $32.56. To determine a relevant P/E ratio for

use in calculation our share price, we chose the

following firms based on revenues, market

capitalization and primary business operations:

Cisco Systems, Inc. (CSCO), Platronics Inc.

(PLT); Ciena Corp. (CIEN); Commscope

Holding Co. (COMM); and Netgear (NTGR). As

discussed earlier, despite differences in size and

scope of operations, we felt it was necessary to

include Cisco System, Inc. The average P/E ratio

calculated for the selection of peers suggests that

Arris Group is trading at a discount to its peers.

We echoed this same sentiment earlier in the

report. We believe investors are underestimating

the strong growth potential demonstrated by Arris

Group, and that now is a great time to buy.

Weighted Average Cost of Capital

Our calculation of Arris Group’s Weighted

Average Cost of Capital (WACC) yielded 9.42%.

Below are separate discussions for each

component used to calculate WACC.

Beta: We compiled a range of Beta calculations

on a weekly basis for a selection of time periods.

We then calculated an aggregate average of the

Beta values gathered. This produced 1.3588.

Cost of Equity: The Cost of Equity that we

calculated for Arris Group is 11.15%. To

calculate the implied Cost of Equity for Arris

Group, we used the Capital Asset Pricing Model

(CAPM). The risk-free rate we selected was the

yield of a 30-year Treasury bond, being 3.04%.

The Beta we used for the CAPM model is 1.3588.

The equity risk premium we use is 5.97%. We

used Damodaran’s calculation of the equity risk

premium of 6.42%, and adjusted it to reflect a risk

free rate of the 20-year Treasury bond yield,

versus the 10-year Treasury bond yield used in

his calculation.22

Cost of Debt: Arris Group has not issued any

bonds. Instead they have two credit facilities with

variable interest rates tied to LIBOR. The

variable interest rates associated with these credit

facilities were very low. We determined low

interest rates are truly not indicative of the risk

associated with the firm. We identified Arris

Group’s credit rating, which was Ba3, then chose

a yield associated with a 20 year bond for

corporations of similar credit riskiness.23 The pre-

tax Cost of Debt arising from our selection was

6.12%, and the after-tax Cost of Debt was 4.41%

Capital Structure: Arris Group’s capital

structure is comprised of equity, short and long-

term debt, and operating leases. Equity’s capital

structure weight was 74.28%. Short and long-

term debt combined made up 24.59% of the

capital structure. Finally, the present value of

operating leases represented 1.13% of the capital

structure. Arris Group does not offer Preferred

Stock.

Sensitivity Analysis

WACC to Marginal Tax Rate: When WACC is

held constant, the valuation range found when

changing the Marginal Tax Rate is $42.06-$44.96.

When the Marginal Tax Rate is held constant,

varying WACC from 7.75%-10.75% yields a

valuation range of $33.32-$58.83. This indicates

that our model is much more sensitive to changes

in the WACC then it is to the Marginal Tax rate.

CV Growth to CV ROIC: When CV Growth is

held constant, the valuation range found when

changing the CV ROIC Rate is $39.11-$42.80.

When the CV ROIC is held constant, varying CV

Growth from 2%-5% produces a valuation range

of $36.49-$49.68. This indicates that our model

is more sensitive to changes in the CV Growth

then it is to the CV ROIC. This is not surprising

as the value of Arris Group comes from the cash

flows in future years, and if we change the CV

growth rate in our model, it will affect the

valuation significantly.

Equity Risk Premium to Beta: It is important to

consider how changes in Beta and the Equity Risk

Premium will affect our valuation. Due to both

Beta and Equity Risk premium being subjective

measures, it is important to see how our model is

sensitive to changes in assumptions regarding

these two variables.

When the Equity Risk Premium is held constant

at 6.42% and Beta is changed, the valuation range

is $32.41-$57.70. This range of Beta calculations

Page | 12

is 1-1.7, which is not abnormal for technology

companies. This large range indicates that Arris

Group’s valuation is highly sensitive to changes

in the Beta. When Beta is held constant at 1.36

the change in Equity Risk Premium creates a

valuation range of $$32.02-$55.58. Our model is

almost equally as sensitive to changes in Beta as

it is to changes in the Equity Risk Premium

COGS as Percentage of Sales to SG&A as

Percentage of Sales: When COGS as a

Percentage of Sales is held constant, the valuation

range found when changing the SG&A as a

Percentage of Sales is $29.88-$51.31. When

SG&A as a Percentage of Sales is held constant,

varying COGS as a Percentage of Sales yields a

valuation range of $39.10-$43.53. The variation

in price when SG&A as a Percentage of Sales

changes indicates that our model is sensitive to

the SG&A expense.

Important Disclaimer

This report was created by students enrolled in

the Security Analysis (6F:112) class at the

University of Iowa. The report was originally

created to offer an internal investment

recommendation for the University of Iowa

Krause Fund and its advisory board. The report

also provides potential employers and other

interested parties an example of the students’

skills, knowledge and abilities. Members of the

Krause Fund are not registered investment

advisors, brokers or officially licensed financial

professionals. The investment advice contained

in this report does not represent an offer or

solicitation to buy or sell any of the securities

mentioned. Unless otherwise noted, facts and

figures included in this report are from publicly

available sources. This report is not a complete

compilation of data, and its accuracy is not

guaranteed. From time to time, the University of

Iowa, its faculty, staff, students, or the Krause

Fund may hold a financial interest in the

companies mentioned in this report.

Page | 13

1 Federal Reserve Bank of St. Louis 2 Reuters Article

<http://www.reuters.com/article/2015/08/27/us-usa-

economy-idUSKCN0QW1IF20150827> 3 Federal Reserve Data

<https://research.stlouisfed.org/fred2/series/GDPC96/

> 4 Federal Reserve Data

<https://research.stlouisfed.org/fred2/series/GDPC96/

> 5 Bloomberg Data

<http://www.bloomberg.com/news/articles/2015-11-

17/dollar-approaches-7-month-peak-as-hedge-funds-

boost-bullish-bets> 6https://ycharts.com/indicators/trade_weighted_excha

nge_index_major

7 http://fortune.com/2015/11/06/jobs-report-interest-

rates-futures/

8http://thereformedbroker.com/2015/10/26/revenue-

disappointment-for-every-sector-except-tech/ 9 S&P Net Advantage Industry Report 10 Arris Group 10k 11 Arris Group 10k 12 Arris Group 10k 13 Arris Group 10k 14 Arris Group 10k 15 S&P Net Advantage Report 16 Arris Group 10k 17 Bloomberg 18 Arris Group 10k 19 Arris Group 10k 20 Bloomberg 21 S&P Net Advantage Report 22 http://pages.stern.nyu.edu/~adamodar/

23 Bloomberg Data

ARRIS GROUP INC. Revenue DecompositionThousandsFiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019ERevenues by Business SegmentConsumer Premises Equipment 611,408 2,448,381 5,933,654 5,280,000 5,187,600 5,089,036 4,984,710 4,873,551

YoY Growth - 300.45% 142.35% -11.02% -1.75% -1.90% -2.05% -2.23%Network & Cloud 742,255 1,193,001 2,014,344 2,720,000 2,826,080 2,944,775 3,074,345 3,215,765

YoY Growth - 60.73% 68.85% 35.03% 3.90% 4.20% 4.40% 4.60%Other - -20,480 -5,077 0 0 0 0 0

YoY Growth - - 75.21% - - - - - Total 1,353,663 3,620,902 7,942,921 8,000,000 8,013,680 8,033,811 8,059,056 8,089,317

YoY Growth 24.34% 167.49% 119.36% 0.72% 0.17% 0.25% 0.31% 0.38%

Segment % of Total RevenueConsumer Premises Equipment 45% 68% 75% 66% 65% 63% 62% 60%Network & Cloud 55% 33% 25% 34% 35% 37% 38% 40%Other - -1% 0% 0% 0% 0% 0% 0%

Revenues by GeographyDomestic 1,020,060 2,457,172 5,592,803 5,680,000 5,689,713 5,623,668 5,560,749 5,500,735

YoY Growth 36.34% 140.89% 127.61% 1.56% 0.17% -1.16% -1.12% -1.08%International

Americas, excluding U.S. 202,887 746,146 1,274,022 1,200,000 1,202,052 1,205,072 1,208,858 1,294,291 YoY Growth 3.78% 267.76% 70.75% -5.81% 0.17% 0.25% 0.31% 7.07%

EMEA 65,162.0 263,910.0 608,175.0 720,000 721,231 803,381 805,906 808,932 YoY Growth -24.07% 305.01% 130.45% 18.39% 0.17% 11.39% 0.31% 0.38%

Asia Pacific 65,554 153,674 467,921 400,000 400,684 401,691 483,543 485,359 YoY Growth 10.74% 134.42% 204.49% -14.52% 0.17% 0.25% 20.38% 0.38%

Total 1,353,663 3,620,902 7,942,921 8,000,000 8,013,680 8,033,811 8,059,056 8,089,317 YoY Growth 24.34% 167.49% 119.36% 0.72% 0.17% 0.25% 0.31% 0.38%

Geography % of Total RevenueDomestic 75% 68% 70% 71% 71% 70% 69% 68%Americas, excluding U.S. 15% 21% 16% 15% 15% 15% 15% 16%EMEA 5% 7% 8% 9% 9% 10% 10% 10%Asia Pacific 5% 4% 6% 5% 5% 5% 6% 6%

ARRIS GROUP INC. Income StatementThousandsFiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019ENet Sales 1,353,663 3,620,902 7,942,921 8,000,000 8,013,680 8,033,811 8,059,056 8,089,317 Cost of Sales 863,133 2,536,638 5,748,937 5,697,344 5,753,614 5,744,745 5,774,499 5,790,260 Depreciation 27,953 61,516 107,988 160,347 160,621 161,025 161,531 162,137

Gross Margin 462,577 1,022,748 2,085,996 2,142,309 2,099,445 2,128,041 2,123,026 2,136,919 Operating Expenses:

Selling, General, and Administrative Expenses 161,338 338,252 572,868 590,400 591,410 592,895 594,758 596,992 Research and Development Expenses 170,706 425,825 640,275 864,800 756,491 813,022 788,176 804,887 Acquired In-Process Research and Development Charge - - - - - - - - Impairment of Goodwill - - - - - - - - Amortization of Intangible Assets 30,294 193,637 318,421 60,750 60,750 60,750 60,750 60,750 Integration, Acquisition, Restructuring and Other Costs 12,968 83,047 61,198 73,500 54,163 5,416 2,708 1,354

Total Operating Expenses 375,306 1,040,761 1,592,762 1,589,450 1,462,814 1,472,083 1,446,392 1,463,983 Operating Income (Loss) 87,271 (18,013) 493,234 552,859 636,631 655,958 676,634 672,937 Other Expense (Income):

Interest Expense 17,797 67,888 70,201 91,849 90,982 90,098 89,255 88,435 Loss (Gain) on Investments and Notes Receivable (1,404) 2,698 10,961 - - - - - Loss (Gain) on Foreign Currency 786 (3,502) 8,837 - - - - - Interest Income (3,242) (2,936) (5,090) (4,104) (5,539) (7,783) (10,130) (12,550) Other Expense (Income), Net (962) 13,989 22,395 - - - - -

Income (Loss) Before Income Taxes 74,296 (96,150) 385,930 465,114 551,188 573,642 597,509 597,052 Income Tax Expense (Benefit) 20,837 (47,390) (60,281) 130,232 154,333 160,620 167,303 167,174 Net Income (Loss) From Continuing Operations 53,459 (48,760) 446,211 334,882 396,855 413,022 430,207 429,877 Income (Loss) From Discontinued Operations - - - - - - - - Net Income (Loss) 53,459 (48,760) 446,211 334,882 396,855 413,022 430,207 429,877

Year-End Shares Outstanding 114,161 131,980 190,165 189,303 188,997 188,863 188,743 188,636Net Earnings (Loss) per Share 0.47 (0.37) 2.35 1.77 2.10 2.19 2.28 2.28 Dividends per Share - - - - - - - -

ARRIS GROUP INC. Balance SheetThousandsFiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019EASSETS

Current assets:Cash and cash equivalents 131,703 442,438 747,890 1,070,150 1,590,605 2,134,817 2,695,856 3,256,927 Short-term investments, at fair value 398,414 67,360 126,748 138,400 138,637 138,985 139,422 139,945 Restricted cash 4,722 1,079 966 1,678 1,681 1,685 1,691 1,697 Accounts receivable 188,581 619,571 1,441,803 1,149,728 1,151,694 1,154,587 1,158,215 1,162,564 Other receivables 350 8,366 76,540 34,880 34,940 35,027 35,137 35,269 Inventories 133,848 330,129 569,165 731,034 732,284 734,124 736,431 739,196 Prepaid income taxes - 13,034 11,023 12,029 12,029 12,029 12,029 12,029 Prepaid Expenses 11,682 61,482 27,497 72,499 72,623 72,806 73,034 73,309 Current deferred income tax assets 24,944 77,167 117,690 107,559 110,092 109,459 109,617 109,577 Other current assets 25,648 57,418 61,450 118,044 118,246 118,543 118,915 119,362

Total current assets 919,892 1,678,044 3,180,772 3,436,002 3,962,831 4,512,062 5,080,347 5,649,875 Property, plant and equipment (net of accumulated depreciation) 54,378 396,152 429,631 474,400 475,211 476,405 477,902 479,696 Goodwill 194,115 940,402 1,407,167 1,407,167 1,407,167 1,407,167 1,407,167 1,407,167 Intangible assets (net of accumulated ammortization) 94,529 1,176,192 1,236,588 1,175,838 1,115,088 1,054,338 993,588 932,838 Long-term investments 86,164 71,176 77,640 76,519 76,519 76,519 76,519 76,519 Noncurrent deferred income tax assets 47,431 7,678 102,886 80,000 80,000 80,000 80,000 80,000 Other assets 9,385 52,363 53,161 61,822 61,928 62,084 62,279 62,513

Total Assets 1,405,894 4,322,007 6,487,845 6,711,748 7,178,744 7,668,574 8,177,802 8,688,608 LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:Accounts payable 45,719 606,340 1,305,550 1,327,288 1,329,558 1,332,898 1,337,086 1,342,107 Accrued compensation, benefits and related taxes 29,773 116,262 145,278 217,661 218,033 218,581 219,268 220,091 Accrued warranty 2,882 48,755 42,763 55,378 55,472 55,612 55,786 55,996 Deferred revenue 44,428 69,071 179,672 233,631 234,031 234,619 235,356 236,240 Short-term debt 222,124 53,254 111,356 49,500 49,500 49,500 49,500 49,500 Income taxes payable - 3,068 37,310 - - - - - Other accrued liabilities 25,795 198,278 214,941 257,202 257,642 258,289 259,101 260,074

Total current liabilities 370,721 1,095,028 2,036,870 2,140,660 2,144,236 2,149,498 2,156,097 2,164,007 Long-term debt, net of current portion - 1,691,034 1,705,170 1,451,301 1,437,135 1,422,696 1,408,912 1,395,512 Accrued pension 26,883 58,657 64,917 82,802 82,943 83,152 83,413 83,726 Noncurrent income tax liability 24,389 21,048 41,082 41,377 41,448 41,552 41,683 41,839 Noncurrent deferred income tax liabilities 351 74,791 89,974 92,248 92,006 91,803 91,651 91,544 Other noncurrent liabilities 23,162 62,462 191,971 142,645 142,889 143,248 143,698 144,237

Total liabilities 445,506 3,003,020 4,129,984 3,951,033 3,940,657 3,931,949 3,925,454 3,920,866 Stockholders’ equity:

Preferred stock - - - - - - - - Common stock and additional paid in capital 1,287,063 1,690,548 1,855,696 1,948,668 2,039,184 2,129,701 2,220,217 2,310,734 Treasury stock at cost -306,330 -306,330 -381,630 (406,630) (416,630) (421,630) (426,630) (431,630) Retained earnings -11,809 -60,569 784,942 1,119,824 1,516,679 1,929,701 2,359,908 2,789,785 Accumulated Other Comprehensive Income (Loss) -8,536 -4,662 98,853 98,853 98,853 98,853 98,853 98,853

Total Stockholders’ Equity 960,388 1,318,987 2,357,861 2,760,715 3,238,086 3,736,625 4,252,348 4,767,742 Total Liabilities and Stockholder's Equity 1,405,894 4,322,007 6,487,845 6,711,748 7,178,744 7,668,574 8,177,802 8,688,608

ARRIS GROUP INC. Cash Flow StatementThousandsFiscal Years Ending Dec. 31 2012 2013 2014Operating activities:Net income (loss) 53,459 (48,760) 327,211

Depreciation 27,953 61,516 78,988 Amortization of intangible assets 30,294 193,637 236,751 Amortization of deferred finance fees and debt discount 639 9,982 11,575 Impairment of goodwill and intangible assets - - - Impairment of long-lived assets - - - Deferred income tax benefit (13,989) (55,763) (163,485) Defferred income tax related to goodwill and intangible asset impairments - - - Stock compensation expense 27,906 35,789 53,799 Provision for doubtful accounts 240 (658) 5,336 Gain related to previously written off recievables - - - Revenue reduction related to Comcast’s investment in ARRIS - 13,182 - Mark-to-market fair value adjustment related to Comcast’s investment in ARRIS - 13,189 - Non-cash restructuring and related charges - 6,761 - Loss (gain) on debt retirement - - - Non cash interest expense on convertible notes 12,358 9,926 - Loss (gain) on disposal and write down of assets 419 1,657 4,247 Loss (gain) on investments (1,404) 2,698 10,961 Income from discontinued operations - - - Gain related to terminated acquisition, net of expenses - - - Acquired in-process research and development charge - - - Excess income tax benefits from stock-based compensation plans (3,549) (7,178) (8,959)

Changes in operating assets and liabilities, net of effect of acquisitions and dispositions:Accounts receivable (37,139) 9,241 17,400 Other receivables 8,398 (2,182) (2,997) Inventories (21,491) 74,111 (71,036) Accounts payable and accrued liabilities (5,675) 247,301 (1,150,390) Prepaids and other, net 5,982 (17,330) 74,529

Net cash provided by operating activities 84,401 562,716 459,281 Investing activities:

Purchases of short-term investments (418,956) (104,626) (127,780) Sales of short-term investments 286,013 479,781 59,679 Purchases of investments - - - Proceeds from equity investments - 14,780 - Purchases of property, plant and equipment (21,507) (71,443) (56,588) Cash proceeds from sale of property, plant, and equipment - - - Acquisition, net of cash acquired - (2,208,114) - Cash paid for hedge related to terminated acquisition - - - Cash proceeds from hedge related to terminated acquisition - - - Cash received related to terminated acquisition, net of payments - - - Other, net 3,388 120 103

Net cash used in investing activities (151,062) (1,889,502) (124,586)

Financing activities:Proceeds from issuance of common stock, net 20,304 175,072 19,196 Repurchase of common stock (51,921) - - Proceeds from issuance of debt - 1,925,000 - Payment of debt obligations - (404,488) (209,653) Cash paid for debt discount - (9,853) - Early redemption of convertible notes - - - Deferred financing cost paid - (42,724) - Excess income tax benefits from stock-based compensation plans 3,549 7,178 8,959 Repurchase of shares to satisfy employee minimum tax withholdings (9,443) (12,664) (29,845)

Net cash (used in) provided by financing activities (37,511) 1,637,521 (211,343) Net increase (decrease) in cash and cash equivalents (104,172) 310,735 123,352 Cash and cash equivalents at beginning of year 235,875 131,703 442,438

Cash and cash equivalents at end of year 131,703 442,438 565,790

ARRIS GROUP INC. Cash Flow StatementThousandsFiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019EOperating activities:Net income (loss) 334,882 396,855 413,022 430,207 429,877

Depreciation 160,347 160,621 161,025 161,531 162,137 Amortization of intangible assets 60,750 60,750 60,750 60,750 60,750 Change in deferred tax assets 33016.8 -2532.7 633.2 -158.3 39.6Change in deferred tax liabilities 2,274.5 -242.3 -203.3 -151.6 -107.1

Changes in operating assets and liabilities, net of effect of acquisitions and dispositions:Change in Restricted Cash (712.4) (2.9) (4.2) (5.3) (6.3) Accounts receivable 292,075.0 (1,966.0) (2,893.1) (3,628.1) (4,349.0) Other receivables 41,660.0 (59.6) (87.8) (110.1) (131.9) Inventories (161,869.4) (1,250.1) (1,839.6) (2,306.9) (2,765.2) Prepaid income taxes (1,005.5) - - - - Prepaid expenses (45,002.2) (124.0) (182.4) (228.8) (274.2) Accounts payable 21,738.0 2,269.7 3,339.9 4,188.4 5,020.6 Accrued compensation, benefits and related taxes 72,382.8 372.2 547.7 686.9 823.3 Accrued warranty 12,614.6 94.7 139.4 174.8 209.5 Deferred revenue 53,959.2 399.5 587.9 737.2 883.7 Income taxes payable (37,310.0) - - - - Other accrued liabilities 42,261.4 439.8 647.2 811.6 972.9 Accrued pension 17,884.9 141.6 208.4 261.3 313.2 Noncurrent income tax liability 295.2 70.8 104.1 130.6 156.5 Other noncurrent liabilities (49,326.2) 243.9 358.9 450.1 539.6

Net cash provided by operating activities 850,916.0 616,081.1 636,153.4 653,339.2 654,089.7

Investing activities:(Increase) decrease in short-term investments (11,652.0) (236.7) (348.3) (436.7) (523.5) Capital expenditures (205,116.2) (161,432.6) (162,218.7) (163,027.9) (163,931.9) (Increase) decrease in long-term investments 1,121.2 - - - - (Increase) decrease in other assets (8,661.4) (105.7) (155.6) (195.1) (233.8)

Net cash used in investing activities (224,308.4) (161,775.0) (162,722.5) (163,659.7) (164,689.2)

Financing activities:(Increase) decrease in other current assets (56,594.0) (201.9) (297.0) (372.5) (446.5) (Decrease) Increase in current portion of long-term debt (61,856.0) - - - - (Decrease) Increase in long-term debt (253,869.1) (14,165.7) (14,438.8) (13,784.4) (13,399.6) Proceeds from issuance of common stock, net 92,972 90,517 90,517 90,517 90,517 Repurchase of common stock (25,000) (10,000) (5,000) (5,000) (5,000) (Decrease) Increase in accumulated other comprehensive income - - - - -

Net cash (used in) provided by financing activities (304,347.6) 66,149.0 70,780.7 71,359.6 71,670.5

Net increase (decrease) in cash and cash equivalents 322,260.0 520,455.0 544,211.7 561,039.2 561,070.9 Cash and cash equivalents at beginning of year 747,890.0 1,070,150.0 1,590,605.1 2,134,816.7 2,695,855.9 Cash and cash equivalents at end of year 1,070,150.0 1,590,605.1 2,134,816.7 2,695,855.9 3,256,926.8

ARRIS GROUP INC. Common Size Income Statement

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019ENet Sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Cost of Sales 63.76% 70.06% 72.38% 71.22% 71.80% 71.51% 71.65% 71.58%Depreciation 2.06% 1.70% 1.36% 2.00% 2.00% 2.00% 2.00% 2.00%

Gross Margin 34.17% 28.25% 26.26% 26.78% 26.20% 26.49% 26.34% 26.42%Operating Expenses:

Selling, General, and Administrative Expenses 11.92% 9.34% 7.21% 7.38% 7.38% 7.38% 7.38% 7.38%Research and Development Expenses 12.61% 11.76% 8.06% 10.81% 9.44% 10.12% 9.78% 9.95%Acquired In-Process Research and Development Charge 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Impairment of Goodwill 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Amortization of Intangible Assets 2.24% 5.35% 4.01% 0.76% 0.76% 0.76% 0.75% 0.75%Integration, Acquisition, Restructuring and Other Costs 0.96% 2.29% 0.77% 0.92% 0.68% 0.07% 0.03% 0.02%

Total Operating Expenses 27.73% 28.74% 20.05% 19.87% 18.25% 18.32% 17.95% 18.10%Operating Income (Loss) 6.45% 0.50% 6.21% 6.91% 7.94% 8.16% 8.40% 8.32%Other Expense (Income):

Interest Expense 1.31% 1.87% 0.88% 1.15% 1.14% 1.12% 1.11% 1.09%Loss (Gain) on Debt Retirement 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Gain Related to Terminated Acquisition, Net of Expenses 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Loss (Gain) on Investments and Notes Receivable 0.10% 0.07% 0.14% 0.00% 0.00% 0.00% 0.00% 0.00%Loss (Gain) on Foreign Currency 0.06% 0.10% 0.11% 0.00% 0.00% 0.00% 0.00% 0.00%Interest Income 0.24% 0.08% 0.06% 0.05% 0.07% 0.10% 0.13% 0.16%Other Expense (Income), Net 0.07% 0.39% 0.28% 0.00% 0.00% 0.00% 0.00% 0.00%

Income (Loss) Before Income Taxes 5.49% 2.66% 4.86% 5.81% 6.88% 7.14% 7.41% 7.38%Income Tax Expense (Benefit) 1.54% 1.31% 0.76% 1.63% 1.93% 2.00% 2.08% 2.07%Net Income (Loss) From Continuing Operations 3.95% 1.35% 5.62% 4.19% 4.95% 5.14% 5.34% 5.31%Income (Loss) From Discontinued Operations 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Net Income (Loss) 3.95% 1.35% 5.62% 4.19% 4.95% 5.14% 5.34% 5.31%

ARRIS GROUP INC. Common Size Balance SheetThousandsFiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

ASSETSCurrent assets:

Cash and cash equivalents 9.73% 12.22% 9.42% 13.38% 19.85% 26.57% 33.45% 40.26%Short-term investments, at fair value 29.43% 1.86% 1.60% 1.73% 1.73% 1.73% 1.73% 1.73%Restricted cash 0.35% 0.03% 0.01% 0.02% 0.02% 0.02% 0.02% 0.02%Accounts receivable 13.93% 17.11% 18.15% 14.37% 14.37% 14.37% 14.37% 14.37%Other receivables 0.03% 0.23% 0.96% 0.44% 0.44% 0.44% 0.44% 0.44%Inventories 9.89% 9.12% 7.17% 9.14% 9.14% 9.14% 9.14% 9.14%Prepaid income taxes 0.00% 0.36% 0.14% 0.15% 0.15% 0.15% 0.15% 0.15%Prepaids 0.86% 1.70% 0.35% 0.91% 0.91% 0.91% 0.91% 0.91%Current deferred income tax assets 1.84% 2.13% 1.48% 1.34% 1.37% 1.36% 1.36% 1.35%Other current assets 1.89% 1.59% 0.77% 1.48% 1.48% 1.48% 1.48% 1.48%

Total current assets 67.96% 46.34% 40.05% 42.95% 49.45% 56.16% 63.04% 69.84%Property, plant and equipment (net of accumulated depreciation) 4.02% 10.94% 5.41% 5.93% 5.93% 5.93% 5.93% 5.93%Goodwill 14.34% 25.97% 17.72% 17.59% 17.56% 17.52% 17.46% 17.40%Intangible assets (net of accumulated ammortization) 6.98% 32.48% 15.57% 14.70% 13.91% 13.12% 12.33% 11.53%Long-term investments 6.37% 1.97% 0.98% 0.96% 0.95% 0.95% 0.95% 0.95%Noncurrent deferred income tax assets 3.50% 0.21% 1.30% 1.00% 1.00% 1.00% 0.99% 0.99%Other assets 0.69% 1.45% 0.67% 0.77% 0.77% 0.77% 0.77% 0.77%

Total Assets 103.86% 119.36% 81.68% 83.90% 89.58% 95.45% 101.47% 107.41%

LIABILITIES & STOCKHOLDERS’ EQUITYCurrent liabilities:

Accounts payable 3.38% 16.75% 16.44% 16.59% 16.59% 16.59% 16.59% 16.59%Accrued compensation, benefits and related taxes 2.20% 3.21% 1.83% 2.72% 2.72% 2.72% 2.72% 2.72%Accrued warranty 0.21% 1.35% 0.54% 0.69% 0.69% 0.69% 0.69% 0.69%Deferred revenue 3.28% 1.91% 2.26% 2.92% 2.92% 2.92% 2.92% 2.92%Short-term debt 16.41% 1.47% 1.40% 0.62% 0.62% 0.62% 0.61% 0.61%Income taxes payable 0.00% 0.08% 0.47% 0.00% 0.00% 0.00% 0.00% 0.00%Other accrued liabilities 1.91% 5.48% 2.71% 3.22% 3.22% 3.22% 3.22% 3.22%

Total current liabilities 27.39% 30.24% 25.64% 26.76% 26.76% 26.76% 26.75% 26.75%Long-term debt, net of current portion 0.00% 46.70% 21.47% 18.14% 17.93% 17.71% 17.48% 17.25%Accrued pension 1.99% 1.62% 0.82% 1.04% 1.04% 1.04% 1.04% 1.04%Noncurrent income tax liability 1.80% 0.58% 0.52% 0.52% 0.52% 0.52% 0.52% 0.52%Noncurrent deferred income tax liabilities 0.03% 2.07% 1.13% 1.15% 1.15% 1.14% 1.14% 1.13%Other noncurrent liabilities 1.71% 1.73% 2.42% 1.78% 1.78% 1.78% 1.78% 1.78%

Total liabilities 32.91% 82.94% 52.00% 49.39% 49.17% 48.94% 48.71% 48.47%Stockholders’ equity:

Preferred stock, par value $1.00 per share 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Common stock, par value $0.01 per share 95.08% 46.69% 23.36% 24.36% 25.45% 26.51% 27.55% 28.57%Treasury stock at cost, 34.2 million shares in 2014 and 2013 -22.63% -8.46% -4.80% -5.08% -5.20% -5.25% -5.29% -5.34%Retained earnings -0.87% -1.67% 9.88% 14.00% 18.93% 24.02% 29.28% 34.49%Accumulated Other Comprehensive Income (Loss) -0.63% -0.13% 1.24% 1.24% 1.23% 1.23% 1.23% 1.22%

Total Stockholders’ Equity 70.95% 36.43% 29.69% 34.51% 40.41% 46.51% 52.76% 58.94%Total Liabilities & Stockholder's Equity 103.86% 119.36% 81.68% 83.90% 89.58% 95.45% 101.47% 107.41%

ARRIS GROUP INC.

Cost of EquityRisk-Free Rate 3.040% (30-Year Treasury)Market Risk Premium 5.97% (Damodaran: Avg. CF yield last 30 years)Beta (Weekly) 1.3588

Cost of Equity 11.15%

Cost of DebtPre-Tax Cost of Debt 6.12%Tax Rate 28.00%

After-Tax Cost of Debt 4.41%

Capital Structure Weights WeightsShares Outstanding 190,165,000 Current Share Price $28.86Market Value Equity 5,488,161,900 74.36%S-T Debt 111,356,000 1.51%L-T Debt 1,705,170,000 23.10%PV of Operating Leases 75,873,167 1.03%

Total Value of Capital 7,380,561,067.26 100%

Weighted Average Cost of Capital 9.42%

Weighted Average Cost of Capital (WACC) Estimation

ARRIS GROUP INC. Value Driver Estimation

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019EEBITA 92,972 -4,101 508,219 557,502 641,758 661,094 681,783 678,102

-Adjusted Taxes 27,985 -18,352 -31,911 156,101 179,692 185,106 190,899 189,868+Δ in Deferred Taxes -132,168 -82,078 -140,656 -225,913 -193,396 -195,742 -195,622 -195,999

=NOPLAT -11,211 -104,530 335,652 487,690 628,054 650,458 677,061 671,971

EBITA:Sales 1,353,663 3,620,902 7,942,921 8,000,000 8,013,680 8,033,811 8,059,056 8,089,317

-COGS -863,133 -2,536,638 -5,748,937 -5,697,344 -5,753,614 -5,744,745 -5,774,499 -5,790,260-SGA -161,338 -338,252 -572,868 -590,400 -591,410 -592,895 -594,758 -596,992-Depreciation -27,953 -61,516 -107,988 -160,347 -160,621 -161,025 -161,531 -162,137-Research & Development -170,706 -425,825 -640,275 -864,800 -756,491 -813,022 -788,176 -804,887-Amortization of Non-Goodwill Intangibles -30,294 -193,637 -318,421 -60,750 -60,750 -60,750 -60,750 -60,750-Integration, Acquisiton, Restructuring, & Other Cos -12,968 -83,047 -61,198 -73,500 -54,163 -5,416 -2,708 -1,354+Implied Interest on PV of Operating Leases 5,701 13,912 14,985 4,643 5,127 5,136 5,149 5,165

EBITA 92,972 -4,101 508,219 557,502 641,758 661,094 681,783 678,102

Adjusted Taxes:Income Tax Provision 20,837 -47,390 -60,281 130,232 154,333 160,620 167,303 167,174

+Tax Shield on Interest Expense 6,478 25,254 19,937 25,718 25,475 25,228 24,991 24,762+Tax Shield on Operating Lease Interest 2,075 5,175 4,256 1,300 1,436 1,438 1,442 1,446-Tax on Interest Income -1,180 -1,092 -1,446 -1,149 -1,551 -2,179 -2,836 -3,514-Tax on Non-Operating Income -511 -1,303 0 0 0 0 0 0+Tax Shield on Non-Operating Losses 286 1,004 5,623 0 0 0 0 0

Adjusted Taxes 27,985 -18,352 -31,911 156,101 179,692 185,106 190,899 189,868

Change in Deferred Taxes:Ending DTL Balance: 351 74,791 89,974 92,248 92,006 91,803 91,651 91,544Ending DTA Balance: 72,375 84,845 220,576 187,559 190,092 189,459 189,617 189,577

Net Change in Ending DT -72,024 -10,054 -130,602 -95,311 -98,086 -97,656 -97,966 -98,033Beg. DTL Balance 337 351 74,791 89,974 92,248 92,006 91,803 91,651Beg DTA Balance 60,481 72,375 84,845 220,576 187,559 190,092 189,459 189,617

Net Change in Beg. DT -60,144 -72,024 -10,054 -130,602 -95,311 -98,086 -97,656 -97,966Δ in Deferred Taxes -132,168 -82,078 -140,656 -225,913 -193,396 -195,742 -195,622 -195,999

IC (invested capital)Operating WC 253,547 171,853 597,660 309,010 309,518 310,265 311,202 312,326 +Net PPE 54,378 396,152 429,631 474,400 475,211 476,405 477,902 479,696 +Other LT Operating Assets 129,308 1,264,196 1,312,461 1,259,617 1,199,011 1,138,471 1,077,986 1,017,553 -Other LT Operating Liabilities - - - - - - - -

=IC 437,234 1,832,201 2,339,752 2,043,028 1,983,740 1,925,142 1,867,090 1,809,575

Operating Working CapitalCurrent Operating Assets

Normal Cash 67,683 181,045 397,146 400,000 400,684 401,691 402,953 404,466 Accounts Recievable (Trade) 188,581 619,571 1,441,803 1,149,728 1,151,694 1,154,587 1,158,215 1,162,564 Other Receivables 350 8,366 76,540 34,880 34,940 35,027 35,137 35,269 Inventory 133,848 330,129 569,165 731,034 732,284 734,124 736,431 739,196 Prepaid Income Taxes - 13,034 11,023 12,029 12,029 12,029 12,029 12,029 Prepaid Expenses 11,682 61,482 27,497 72,499 72,623 72,806 73,034 73,309

Total Operating Current Assets 402,144 1,213,627 2,523,174 2,400,170 2,404,254 2,410,263 2,417,799 2,426,833 Current Operating Liabilties

Accounts Payable (Trade) 45,719 606,340 1,305,550 1,327,288 1,329,558 1,332,898 1,337,086 1,342,107 Accrued Expenses 29,773 116,262 145,278 217,661 218,033 218,581 219,268 220,091 Accrued Warranty 2,882 48,755 42,763 55,378 55,472 55,612 55,786 55,996 Deferred Revenue 44,428 69,071 179,672 233,631 234,031 234,619 235,356 236,240 Income Taxes Payable - 3,068 37,310 - - - - - Other accrued liabilities 25,795 198,278 214,941 257,202 257,642 258,289 259,101 260,074

Total Operating Current Liabilities 148,597 1,041,774 1,925,514 2,091,160 2,094,736 2,099,998 2,106,597 2,114,507 Net Operating Working Capital 253,547 171,853 597,660 309,010 309,518 310,265 311,202 312,326 Net PPE 54,378 396,152 429,631 474,400 475,211 476,405 477,902 479,696 Other LT Operating Assets

Net Intangible Assets (excluding goodwill) 94,529 1,176,192 1,236,588 1,175,838 1,115,088 1,054,338 993,588 932,838PV of Operating Leases 34,779 88,004 75,873 83,779 83,923 84,133 84,398 84,715

Total LT Operating Assets 129,308 1,264,196 1,312,461 1,259,617 1,199,011 1,138,471 1,077,986 1,017,553Other LT Operating Liabilities

- - - - - - - - Total LT Operating Liabilities - - - - - - - -

ROICNOPLAT / Beginning IC -2.77% -23.91% 18.32% 20.84% 30.74% 32.79% 35.17% 35.99%

EPBeg. IC * (ROIC - WACC) (49,346) (145,728) 163,014 267,229 435,551 463,542 495,665 496,046

Beginning IC 404,717 437,234 1,832,201 2,339,752 2,043,028 1,983,740 1,925,142 1,867,090 ROIC -2.77% -23.91% 18.32% 20.84% 30.74% 32.79% 35.17% 35.99%WACC 9.42% 9.42% 9.42% 9.42% 9.42% 9.42% 9.42% 9.42%

FCFNOPLAT - Change in IC

NOPLAT -11,211 -104,530 335,652 487,690 628,054 650,458 677,061 671,971-change in IC 32,517 1,394,967 507,552 (296,725) (59,288) (58,598) (58,051) (57,515)

FCF -43,728 -1,499,497 -171,900 784,415 687,342 709,056 735,112 729,486

ARRIS GROUP INC.

Key Inputs: CV Growth 3.50% CV ROIC 22% WACC 9.42% Cost of Equity 11.15%

DCF ModelFiscal Years Ending 2015E 2016E 2017E 2018E 2019EFCF 784,415 687,342 709,056 735,112 729,486 CV 9,875,060

Discount Periods 1 2 3 4 5Discount Factor 1.0942 1.1973 1.3101 1.4336 1.5687

Present Value 716,868 574,064 541,205 512,776 6,760,211

Value of operating assets 9,105,124 +Excess Cash 350,744 +Short-term investments, at fair value 126,748 +Restricted cash 966 +Other Current Assets 61,450 +Long-term investments 77,640 +Other Assets 53,161 -Short-term debt (111,356) -Long-term debt (1,705,170) -PV of operating leases (75,873) -ESOP (410)

Value of Equity 7,883,024 Shares outstanding, in thousands 190,165 Intrinsic value 41.45Intrinsic value (adjusted) 44.87

EP ModelFiscal Years Ending 2015E 2016E 2017E 2018E 2019EEP 267,229 435,551 463,542 495,665 496,046 CV 8,065,485

Discount Period 1 2 3 4 5Discount Factor 1.0942 1.1973 1.3101 1.4336 1.5687

Present Value 244,217 363,770 353,810 345,751 5,457,825

PV of economic profit 6,765,372 Plus: Beginning invested capital 2,339,752 Value of operating assets 9,105,124

+Excess Cash 350,744 +Short-term investments, at fair value 126,748 +Restricted cash 966 +Other Current Assets 61,450 +Long-term investments 77,640 +Other Assets 53,161 -Short-term debt (111,356) -Long-term debt (1,705,170) -PV of operating leases (75,873) -ESOP (410)

Value of Equity 7,883,024 Shares outstanding, in thousands 190,165 Intrinsic value 41.45Intrinsic value (adjusted) 44.87

For Discounting:Number of Periods 2 3 4 5 6

Today 11/17/2015Next FYE 12/31/2015Last FYE 12/31/2014Days in FY 365 Days to FYE 321 Elapsed Fraction 0.879

Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

ARRIS GROUP INC. Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E

EPS 1.77$ 2.10$ 2.19$ 2.28$ 2.28$

Key Assumptions CV growth 3.50% CV ROE 9.02% Cost of Equity 11.15%

Future Cash Flows P/E Multiple (CV Year) 20.41 EPS (CV Year) 2.36$ Future Stock Price 48.14947

Dividends Per Share 0.25$ 0.25$ 0.25$ 0.25$ 0.25$ Dicount Periods 1 2 3 4 5Discount Factor 1.0304 1.061724 1.094001 1.127258 1.161527

Discounted Cash Flows 0.24$ 0.24$ 0.23$ 0.22$ 41.67$

Intrinsic Value 42.35$

ARRIS GROUP INC. Relative Valuation Models

EPS EPS Est. 5yrTicker Company Price 2015E 2016E P/E 15 P/E 16 EPS gr. PEG 15 PEG 16CSCO Cisco Systems, Inc. $28.45 $2.21 $2.29 12.9 12.4 9.4 1.37 1.32 PLT Platronics Inc $53.89 $3.04 $2.86 17.7 18.8 14.4 1.23 1.31 CIEN Ciena Corp $24.51 $1.27 $1.63 19.3 15.0 16.7 1.16 0.90 COMM Commscope Holding Co. $32.41 $1.92 $2.40 16.9 13.5 9.3 1.82 1.45 NTGR Netgear $43.97 $2.06 $2.48 21.3 17.7 6.6 3.23 2.69

Average 17.6 15.5 1.8 1.5

ARRS ARRIS GROUP INC. $28.86 $1.77 $2.10 16.3 13.7 6.54% 249.6 210.3

Implied Value: Relative P/E (EPS15) $ 31.18 Relative P/E (EPS16) 32.56$ PEG Ratio (EPS15) 0.20$ PEG Ratio (EPS16) 0.21$

ARRIS GROUP INC. Key Management RatiosFiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Liquidity RatiosCurrent Ratio = Current Assets/Current Liabilities 2.48 1.53 1.56 1.61 1.85 2.10 2.36 2.61Quick Ratio = (Current Assets-Inventory)/Current Liabilities 2.12 1.23 1.28 1.26 1.51 1.76 2.01 2.27Operating Cash Flow-to-Current Liabilities 0.23 0.51 0.23 0.40 0.29 0.30 0.30 0.30

Activity or Asset-Management RatiosInventory Turnover Ratio = COGS/Avg. Inventory 6.91 10.93 12.79 8.76 7.86 7.84 7.85 7.85A/P Turnover Ratio = Inventory/Avg. Accounts Payable 3.10 1.01 0.60 0.56 0.55 0.55 0.55 0.55Asset Turnover Ratio = Sales/Avg. Total Assets 0.98 1.26 1.47 1.21 1.15 1.08 1.02 0.96

Financial Leverage RatiosL/T Debt-to-Shareholder Equity Ratio - 1.28 0.72 0.53 0.44 0.38 0.33 0.29 L/T Debt-to-Total Assets - 0.39 0.26 0.22 0.20 0.19 0.17 0.16 Interest Coverage Ratio = EBIT/Interest Expense 3.52 (2.91) 2.70 5.41 6.39 6.66 6.96 6.98

Profitability RatiosGross Margin = (Sales -(Cost of Sales+Depreciation))/Sales 34.17% 28.25% 26.26% 26.78% 26.20% 26.49% 26.34% 26.42%Profit Margin = NI/Sales 3.95% -1.35% 5.62% 4.19% 4.95% 5.14% 5.34% 5.31%ROA = NI/Total Assets 3.80% -1.13% 6.88% 4.99% 5.53% 5.39% 5.26% 4.95%ROE = NI/SE 5.57% -3.70% 18.92% 12.13% 12.26% 11.05% 10.12% 9.02%Return on R&D Multiple = NI/R&D Expenses 31.32% -11.45% 69.69% 38.72% 52.46% 50.80% 54.58% 53.41%

41.45 7.75% 8.25% 8.75% 9.16% 9.75% 10.25% 10.75%25.00% 56.91 50.64 45.56 42.06 37.81 34.79 32.1826.00% 57.55 51.22 46.08 42.54 38.25 35.20 32.5627.00% 58.19 51.79 46.60 43.02 38.69 35.61 32.94

Marginal Tax Rate 28.00% 58.83 52.36 47.12 43.51 39.13 36.01 33.3229.00% 59.47 52.94 47.64 43.99 39.57 36.42 33.7030.00% 60.10 53.51 48.16 44.48 40.01 36.83 34.0831.00% 60.74 54.08 48.68 44.96 40.45 37.24 34.47

41.45 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% 5.00%16.00% 35.44 36.49 37.70 39.11 40.75 42.72 45.1218.00% 35.87 37.07 38.46 40.06 41.95 44.22 46.9820.00% 36.21 37.53 39.06 40.83 42.91 45.41 48.46

CV ROIC 22.00% 36.49 37.91 39.55 41.45 43.70 46.39 49.6824.00% 36.73 38.23 39.96 41.98 44.35 47.20 50.6926.00% 36.92 38.50 40.31 42.42 44.91 47.89 51.5528.00% 37.09 38.73 40.61 42.80 45.38 48.49 52.28

41.45 5.00% 5.50% 6.00% 6.42% 7.00% 7.50% 8.00%100.00% 77.10 68.99 62.38 57.70 52.24 48.26 44.81110.00% 69.66 62.32 56.33 52.09 47.14 43.53 40.41120.00% 63.48 56.78 51.31 47.43 42.90 39.60 36.74

Beta 135.88% 55.58 49.69 44.87 41.45 37.46 34.55 32.02150.00% 49.98 44.65 40.30 37.21 33.59 30.95 28.66160.00% 46.62 41.63 37.55 34.66 31.27 28.79 26.64170.00% 43.65 38.97 35.13 32.41 29.21 26.88 24.86

41.45 67.00% 68.50% 70.00% 71.22% 73.00% 74.50% 76.00%6.00% 53.39 52.65 51.91 51.31 50.44 49.70 48.966.50% 49.82 49.08 48.34 47.74 46.86 46.13 45.397.00% 46.24 45.51 44.77 44.17 43.29 42.55 41.82

SG&A as % of Sales 7.38% 43.53 42.79 42.05 41.45 40.58 39.84 39.108.00% 39.10 38.36 37.62 37.02 36.15 35.41 34.678.50% 35.53 34.79 34.05 33.45 32.57 31.83 31.109.00% 31.95 31.21 30.48 29.88 29.00 28.26 27.52

COGS as % of Sales

WACC

CV Growth

Market Risk Premium

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol ARRSCurrent Stock Price $28.86Risk Free Rate 3.04%Current Dividend Yield 9.42%Annualized St. Dev. of Stock Returns 38.80%

Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price Granted9.00-10.99 9,196 10.11 0.81 16.88$ 155,217$ 11.00-13.99 28,804 12.57 5.40 8.85$ 254,825$ 9.00-13.99 38,000 11.97$ 4.29 18.58$ 410,042$

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outst

Number of Options Outstanding (shares): 38,000Average Time to Maturity (years): 4.29Expected Annual Number of Options Exercised: 8,859

Current Average Strike Price: 11.97$ Cost of Equity: 11.15%Current Stock Price: $28.86

2015E 2016E 2017E 2018E 2019EIncrease in Shares Outstanding: 9,196 7,201 7,201 7,201 7,201Average Strike Price: 10.11$ 12.57$ 12.57$ 12.57$ 12.57$ Increase in Common Stock Account: 92,972 90,517 90,517 90,517 90,517

Change in Treasury Stock 25,000,000 10,000,000 5,000,000 5,000,000 5,000,000Expected Price of Repurchased Shares: 28.70$ 31.90$ 35.46$ 39.41$ 43.81$ Number of Shares Repurchased: 871,080 313,473 141,011 126,863 114,135

Shares Outstanding (beginning of the year) 190,165,000 189,303,116 188,996,843 188,863,033 188,743,371Plus: Shares Issued Through ESOP 9,196 7,201 7,201 7,201 7,201Less: Shares Repurchased in Treasury 871,080 313,473 141,011 126,863 114,135 Shares Outstanding (end of the year) 189,303,116 188,996,843 188,863,033 188,743,371 188,636,437

Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2012) Present Value of Operating Lease Obligations (20

Operating Operating Operating OperatingFiscal Years Ending Dec. 31 Leases Fiscal Years Ending 41.9755078456526 Leases Fiscal Years Ending Leases Fiscal Years Ending 44.7676923551432 Leases2015 22654 2014 22803 2013 10624 2012 107992016 18695 2015 20451 2014 8937 2013 91672017 13613 2016 17041 2015 7139 2014 65022018 9764 2017 12595 2016 5159 2015 51682019 7099 2018 9143 2017 3870 2016 3374Thereafter 20457 Thereafter 26194 Thereafter 5668 Thereafter 7182Less: Sublease Income -1424 Less: Sublease Income -6311 Less: Sublease Income -917 Less: Sublease Income -522Total Minimum Payments 90858 Total Minimum Payments 101916 Total Minimum Payments 40480 Total Minimum Payments 41670Less: Interest 14985 Less: Interest 13912 Less: Interest 5701 Less: Interest 6465PV of Minimum Payments 75873 PV of Minimum Payments 88004 PV of Minimum Payments 34779 PV of Minimum Payments 35205

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 6.12% Pre-Tax Cost of Debt 6.12% Pre-Tax Cost of Debt 6.12% Pre-Tax Cost of Debt 6.12%Number Years Implied by Year 6 Payment 2.9 Number Years Implied by Year 6 Payment 2.9 Number Years Implied by Year 6 Payment 1.5 Number Years Implied by Year 6 Paym 2.1

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment1 22654 21347.5 1 22803 21487.9 1 10624 10011.3 1 10799 10176.22 18695 16600.9 2 20451 18160.2 2 8937 7935.9 2 9167 8140.23 13613 11391.0 3 17041 14259.5 3 7139 5973.7 3 6502 5440.74 9764 7699.1 4 12595 9931.4 4 5159 4068.0 4 5168 4075.15 7099 5274.9 5 9143 6793.6 5 3870 2875.6 5 3374 2507.06 & beyond 7099 13559.8 6 & beyond 9143 17370.9 6 & beyond 3870 3915.0 6 & beyond 3374 4865.5PV of Minimum Payments 75873.2 PV of Minimum Payments 88003.5 PV of Minimum Payments 34779.4 PV of Minimum Payments 35204.7

Present Value of Operating Lease Obligations (2010) Present Value of Operating Lease Obligations (2009) Present Value of Operating Lease Obligations (2008) Present Value of Operating Lease Obligations (20

Operating Operating Operating OperatingFiscal Years Ending Leases Fiscal Years Ending Leases Fiscal Years Ending Leases Fiscal Years Ending Leases2011 6495 2010 8154 2009 7285 2008 58802012 5367 2011 5860 2010 6068 2009 43392013 4361 2012 3658 2011 4427 2010 32712014 2893 2013 2445 2012 3008 2011 30202015 2519 2014 1096 2013 2278 2012 1789Thereafter 8358 Thereafter 1955 Thereafter 3067 Thereafter 3586Less: Sublease Income -24 Less: Sublease Income -167 Less: Sublease Income -297 Less: Sublease Income -110Total Minimum Payments 29969 Total Minimum Payments 23001 Total Minimum Payments 25836 Total Minimum Payments 21775Less: Interest 5810 Less: Interest 2973 Less: Interest 3688 Less: Interest 3495PV of Minimum Payments 24159 PV of Minimum Payments 20028 PV of Minimum Payments 22148 PV of Minimum Payments 18280

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 6.12% Pre-Tax Cost of Debt 6.12% Pre-Tax Cost of Debt 6.12% Pre-Tax Cost of Debt 6.12%Number Years Implied by Year 6 Payment 3.3 Number Years Implied by Year 6 Payment 1.8 Number Years Implied by Year 6 Payment 1.3 Number Years Implied by Year 6 Paym 2.0

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment1 6495 6120.4 1 8154 7683.8 1 7285 6864.9 1 5880 5540.92 5367 4765.8 2 5860 5203.6 2 6068 5388.3 2 4339 3853.03 4361 3649.2 3 3658 3060.9 3 4427 3704.4 3 3271 2737.14 2893 2281.2 4 2445 1927.9 4 3008 2371.9 4 3020 2381.35 2519 1871.7 5 1096 814.4 5 2278 1692.7 5 1789 1329.36 & beyond 2519 5470.9 6 & beyond 1096 1337.8 6 & beyond 2278 2125.8 6 & beyond 1789 2438.2PV of Minimum Payments 24159.2 PV of Minimum Payments 20028.4 PV of Minimum Payments 22147.8 PV of Minimum Payments 18279.7

Present Value of Operating Lease Obligations (2006) Present Value of Operating Lease Obligations (2005)

Operating Operating#REF! Leases Fiscal Years Ending Leases2007 6091 2006 69182008 5082 2007 58222009 3849 2008 48722010 3036 2009 36662011 2846 2010 2983Thereafter 4878 Thereafter 7608Less: Sublease Income -294 Less: Sublease Income -939Total Minimum Payments 25488 Total Minimum Payments 30930Less: Interest 4161 Less: Interest 4966PV of Minimum Payments 21327 PV of Minimum Payments 25964

Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 6.12% Pre-Tax Cost of Debt 6.12%Number Years Implied by Year 6 Payment 1.7 Number Years Implied by Year 6 Payment 2.6

Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment1 6091 5739.7 1 6918 6519.02 5082 4512.7 2 5822 5169.83 3849 3220.7 3 4872 4076.84 3036 2393.9 4 3666 2890.75 2846 2114.7 5 2983 2216.56 & beyond 2846 3344.8 6 & beyond 2983 5091.4PV of Minimum Payments 21326.7 PV of Minimum Payments 25964.3