Amortization of acquisition related intangible assets – The Company excluded the amortization of its acquisition related intangible assets including developed technologies and customer relationships. The fair value of the acquisition related intangible assets, which was recognized through acquisition 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 the amortization expense of acquisition related assets is appropriate as 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 the amortization expense as there is significant variability and unpredictability among companies with respect to this expense.
Gain on sale of assets –During the second quarter of 2015, the Company sold a building located in Taiwan and this gain was excluded from management’s assessment of the Company’s core operating performance. The Company believes the exclusion of the gain on sale of assets provides investors an enhanced view of a gain the Company may incur from time to time and facilitates comparisons with results of other periods that may not reflect such gains.
Tax expense related to tax audit – The Company excluded additional tax expense in regard to a tax audit of the China tax authorities. The China government audited the Company’s High and New Technology Enterprise (“HNTE”) status for the years 2009 through 2015 and determined there was an underpayment for the tax year 2014. The Company has been approved for the HNTE status for 2014 through 2017. Given that 2014 is an isolated occurrence, the additional tax and any penalties and interest associated with the audit are being excluded. The Company believes the exclusion of tax expense related to this tax audit provides investors with a more accurate indication of tax expense likely to be incurred on an ongoing basis and facilitates comparisons with the results of other periods that may not reflect such audit determinations.
NON-GAAP EARNINGS PER SHARE
This non-GAAP financial measure is the portion of the Company’s GAAP net income assigned to each share of stock, excluding retention costs, amortization of acquisition related intangible assets, inventory valuations, acquisition costs and tax payments related to tax audit, as discussed above. Excluding retention costs, inventory valuations, acquisition costs and tax payments related to tax audit provides investors with a better depiction of the Company’s operating results and provides a more informed baseline for modeling future earnings expectations. Excluding the amortization of acquisition related intangible assets allows for comparison of the Company’s current and historic operating performance, as described in further detail above. This non-GAAP measure 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. For example, we do not adjust for any amounts attributable to noncontrolling interest except for one-time non-cash items outside the course of ordinary business, such as impairment of goodwill. The Company recommends a review of diluted earnings per share on both a GAAP basis and non-GAAP basis be performed to obtain a comprehensive view of the Company’s results. Information on how these share calculations are made is included in the reconciliation tables provided.
CASH FLOW ITEMS
Free cash flow (FCF) (Non-GAAP)
FCF for the fourth quarter of 2015 is a non-GAAP financial measure, which is calculated by subtracting capital expenditures from cash flow from operations. For the fourth quarter of 2015, FCF was ($16.9) million ($21.4 million less $38.2 million). FCF 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, 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 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.