ADJUSTED NET INCOME AND ADJUSTED EARNINGS PER SHARE
The Company adjusts United States generally accepted accounting principles (“GAAP”) net income and earnings per share attributable to common stockholders to provide investors a better depiction of the Company’s operating results, allow for a more accurate comparison between the Company’s current and historical operating results and provide a baseline for more informed modeling of future earnings. The Company makes adjustments for inventory acquired, transaction costs, retention costs, amortization of acquisition-related intangible assets and restructuring costs. The Company also excludes these items to evaluate the Company’s operating performance, develop budgets, determine incentive compensation awards and manage cash expenditure. The 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 the prospects of 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. 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 net income on both a GAAP basis and non-GAAP basis be performed to get a comprehensive view of the Company’s results and provides a reconciliation of GAAP net income to non-GAAP adjusted net income.
Detail of non-GAAP adjustments
Amortization of acquisition-related intangible assets – The Company excluded this item, including amortization of 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 life of the applicable assets. The Company believes that 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.
KFAB restructuring – The Company has recorded restructuring charges related to the shutdown and relocation of its wafer fabrication facility located in Lee’s Summit, MO (“KFAB”). These restructuring charges are excluded from management’s assessment of the Company’s operating performance. The Company believes the exclusion of the restructuring charges provides investors an enhanced view of the cost structure of the Company’s operations and facilitates comparisons with the results of other periods that may not reflect such charges or may reflect different levels of such charges.
CASH FLOW ITEMS
Free cash flow (FCF) (Non-GAAP)
FCF for the third quarter of 2018 is a non-GAAP financial measure, which is calculated by subtracting capital expenditures from cash flow from operations. For the third quarter of 2018, FCF was a $16.4 million, which 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 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.
