ADJUSTED NET INCOME and ADJUSTED EARNINGS PER SHARE (Non-GAAP)
This consists of generally accepted accounting principles (“GAAP”) net income and earnings per share, which are then adjusted solely for the purpose of adjusting for amortization of acquisition-related intangible assets and retention costs. Excluding the above items provides investors with a better depiction of the Company’s operating results and provides a more informed baseline for modeling future earnings expectations. The Company excludes the above items to evaluate the Company’s operating performance, to develop budgets, and to manage cash expenditures. Presentation of the above non-GAAP measures allows investors to review the Company’s results of operations from the same viewpoint as the Company’s management and Board of Directors. The Company has historically provided similar non-GAAP financial measures to provide investors an enhanced understanding of its operations, facilitate investors’ analyses and comparisons of its current and past results of operations and provide insight into its future performance. The Company also believes the non-GAAP measures are useful to investors because they provide additional information that research analysts use to evaluate semiconductor companies. These non-GAAP measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, GAAP results and may differ from measures used by other companies. The Company recommends a review of net income and earnings per share on both a GAAP and non-GAAP basis to obtain a comprehensive view of the Company’s results. The Company provides a reconciliation of GAAP net income and GAAP earnings per share to non-GAAP adjusted net income and non-GAAP adjusted earnings per share.
Retention costs – The Company excluded costs related to the employee retention plan in connection with the acquisition of BCD Semiconductor Manufacturing Limited. The retention payments are payable at the 12, 18 and 24 month anniversaries of the acquisition with the majority of the expense occurring in the third 12 months. Although these retention costs recurred every quarter until the final retention payment was made in third quarter 2015, they are not part of the normal annual salaries and therefore have been excluded. The Company believes the exclusion of this item provides investors an enhanced view of certain costs the Company may incur from time to time and facilitates comparisons with the results of other periods that may not reflect such costs.
M&A Transaction cost – The Company excluded costs associated with the proposed Pericom Semiconductor Corporation acquisition, which consisted of advisory, legal and other professional and consulting fees. These costs were expensed in the third quarter of 2015 as that was when the costs were incurred and services were received of which, the corresponding tax adjustments were made for the non-deductible portions of these expenses. The Company believes the exclusion of the acquisition related costs provides investors an enhanced view of certain costs the Company may incur from time to time and facilitates comparisons with the results of other periods that may not reflect such costs.
Impairment of long-lived assets – The Company excluded impairments recorded on long-lived assets that were primarily related to assets that will no longer be used in our production process as we transition from six inch to eight inch production capability in our China wafer fabrication facility.
Amortization of acquisition-related intangible assets – The Company excluded this item, including developed technologies and customer relationships. The fair value of the acquisition-related intangible assets, which was recognized through purchase accounting, is amortized using straight-line methods which approximate the proportion of future cash flows estimated to be generated each period over the estimated useful lives of the applicable assets. The Company believes the exclusion of this item is appropriate because a significant portion of the purchase price for its acquisitions was allocated to the intangible assets that have short lives and exclusion of the amortization expense allows comparisons of operating results that are consistent over time for both the Company’s newly acquired and long-held businesses. In addition, the Company excluded this item because there is significant variability and unpredictability among companies with respect to this expense.
CASH FLOW ITEMS
Free cash flow (FCF) (Non-GAAP)
FCF for the third quarter 2015 is calculated by subtracting capital expenditures from cash flow from operations. For the third quarter 2015, FCF was ($2.6) million and represents the cash and cash equivalents that we are able to generate after taking into account cash outlays required to maintain or expand property, plant and equipment. FCF is important because it allows us to pursue opportunities to develop new products, make acquisitions and reduce debt.
CONSOLIDATED RECONCILIATION OF NET INCOME TO EBITDA
EBITDA represents earnings before net interest expense, income tax
provision, depreciation and amortization. Management believes EBITDA is
useful to investors because it is frequently used by securities
analysts, investors and other interested parties, such as financial
institutions in extending credit and in evaluating companies in our
industry, and provides further clarity on our profitability. In
addition, management uses EBITDA, along with other GAAP and non-GAAP
measures, in evaluating our operating performance compared to that of
other companies in our industry. The calculation of EBITDA generally
eliminates the effects of financing, operating in different income tax
jurisdictions, and accounting effects of capital spending, including the
impact of our asset base, which can differ depending on the book value
of assets and the accounting methods used to compute depreciation and
amortization expense. EBITDA is not a recognized measurement under GAAP,
and when analyzing our operating performance, investors should use
EBITDA in addition to, and not as an alternative for, income from
operations and net income, each as determined in accordance with GAAP.
Because not all companies use identical calculations, our presentation
of EBITDA may not be comparable to similarly titled measures used by
other companies. For example, our EBITDA takes into account all net
interest expense, income tax provision, depreciation and amortization
without taking into account any amounts attributable to noncontrolling
interest. Furthermore, EBITDA is not intended to be a measure of
free cash flow for management’s discretionary use, as it does not
consider certain cash requirements such as tax and debt service payments.