SOURCE: FLIR Systems, Inc.

FLIR Systems, Inc.

February 14, 2017 07:30 ET

FLIR Systems Announces Fourth Quarter and Full Year 2016 Financial Results

Fourth Quarter and Full Year Revenue Growth of 8% and 7%; Fourth Quarter and Full Year Operating Cash Flow Growth of 24% and 13%; Quarterly Dividend Increased 25% to $0.15 Per Share

WILSONVILLE, OR--(Marketwired - Feb 14, 2017) - FLIR Systems, Inc. (NASDAQ: FLIR) today announced financial results for the fourth quarter and full year ended December 31, 2016.

Fourth quarter 2016 revenue was $474.7 million, up 8% compared to fourth quarter 2015 revenue of $437.6 million. GAAP operating income in the fourth quarter was $92.3 million, compared to $93.5 million in the fourth quarter of 2015. Fourth quarter 2016 GAAP net income was $61.5 million, or $0.45 per diluted share, compared with GAAP net income of $70.2 million, or $0.51 per diluted share in the fourth quarter a year ago. Cash provided by operations in the fourth quarter reached $97.1 million, FLIR's highest quarterly cash flow since 2013, which was driven largely by continued improvements in working capital.

Excluding the impact of discrete tax items, cost-basis investment gains and losses, restructuring charges, SkyWatch™ remediation charges, and the impact of fourth quarter 2016 acquisitions, fourth quarter historical-method adjusted earnings per share were $0.48, compared to historical-method adjusted earnings per share of $0.47 in the fourth quarter of 2015. Full year 2016 historical-method adjusted earnings per share were $1.56, equal to historical-method adjusted earnings per share for 2015. A reconciliation table summarizing historical-method adjustments is below under the heading: "GAAP to Non-GAAP Reconciliation -- As Previously Guided."

Moving forward, in addition to GAAP results, FLIR will provide new non-GAAP adjusted earnings metrics. These new metrics remove certain non-core items (including gains and losses) that FLIR management believes are not reflective of ongoing operating performance, such as restructuring charges, gains and losses on disposal of non-core assets, discrete tax items, business acquisition-related expenses, and amortization expense related to acquired intangible assets. FLIR management believes these new adjusted earnings metrics provide a view of the Company's core operating results and facilitate consistent comparison of financial results over time. A reconciliation table summarizing the adjustments to the 2016 financial results for the fourth quarter and full year 2016 and 2015 is provided below. A reconciliation of quarterly results for 2016 and 2015 will be provided in the summary presentation that accompanies FLIR's fourth quarter results conference call, available in the Events & Presentations section of www.FLIR.com/investor.

Adjusted operating income in the fourth quarter of 2016 was $103.3 million, compared to $98.7 million in the fourth quarter of 2015. Fourth quarter 2016 adjusted net income was $71.9 million, or $0.52 per diluted share, compared with adjusted net income of $69.6 million, or $0.50 per diluted share in the fourth quarter of 2015.

Revenue from the Surveillance segment was $158.5 million, an increase of 5% from fourth quarter results last year. The Instruments segment contributed $96 million of revenue during the fourth quarter, down 3% from the prior year. The Security segment recorded revenue of $73.1 million in the fourth quarter, up 7% over the prior year. FLIR's OEM & Emerging Markets segment had $76.1 million of revenue, an increase of 55% over the prior year due partially to the addition of the acquired Intelligent Imaging Solutions business as well as strong camera cores demand. Revenue from the Maritime segment was $38.3 million, which increased 6% compared to the fourth quarter of 2015. The Detection segment contributed $32.7 million of revenue, a decline of 6% versus the prior year.

For the full year, revenue was $1,662.2 million, up 7% compared to $1,557.1 million for the year ended December 31, 2015. GAAP operating income for 2016 was $295.7 million, compared to $305.8 million in 2015. Adjusted operating income for 2016 was $324.7 million, compared to 2015 adjusted operating income of $325.0 million. GAAP net income for 2016 was $166.6 million, or $1.20 per diluted share, which compares to 2015 GAAP net income of $241.7 million, or $1.72 per diluted share. Adjusted net income in 2016 was $233.9 million, or $1.69 per diluted share, which compares to 2015 adjusted net income of $232.8 million, or $1.65 per diluted share. Cash provided by operations during 2016 was $312.3 million, which compares to $275.8 million in the prior year and represents a 13% increase.

FLIR's backlog of firm orders for delivery within the next twelve months was approximately $592 million as of December 31, 2016, a decrease of $52 million, or 8%, during the quarter and a decrease of $12 million, or 2%, below the $604 million balance at the end of 2015.

"We are pleased with the progress we have made in building our core business, the addition of the new business areas through the four acquisitions we completed this year, and our strong operating cash flow growth," said Andy Teich, President and CEO of FLIR. "While we are disappointed with this quarter's results from a margin perspective, we are confident in our ability to drive continued growth and improve margins in 2017. During 2016 we expanded our market share in nearly all of the markets we serve and built a strong backlog as a foundation for 2017. We look forward to the launch of several new product platforms in the first half of the year which should drive further growth."

Revenue and Earnings Outlook for 2017

FLIR also announced today that it currently expects revenue in 2017 to be in the range of $1.78 billion to $1.83 billion and adjusted earnings per diluted share to be in the range of $1.81 to $1.91. This represents 7% to 10% growth in revenue and 7% to 13% growth in adjusted earnings per diluted share.

Dividend Increase and Declaration

FLIR's Board of Directors has approved a quarterly cash dividend of $0.15 per share on FLIR common stock, an increase of 25% over the previous quarterly dividend of $0.12 per share. The Board of Directors has declared the dividend payable on March 10, 2017, to shareholders of record as of close of business on February 24, 2017.

Share Repurchase Program

Also today, FLIR announced that its Board of Directors approved a new share repurchase program that authorizes the repurchase of up to 15 million shares over the next two years. The number of shares authorized for repurchase represents approximately 11% of FLIR's outstanding common stock as of December 31, 2016.

Conference Call

FLIR has scheduled a conference call at 11:00 a.m. ET (8:00 a.m. PT) today to discuss its results for the quarter and the year. A simultaneous webcast of the conference call and the accompanying summary presentation may be accessed from the Events section of www.FLIR.com/investor. A replay will be available after 2:00 p.m. ET (11:00 a.m. PT) at this same address. Summary fourth quarter and historical financial data may be accessed from the Financial Info Database link under the Financials & Filings section at www.FLIR.com/investor.

About FLIR Systems

FLIR Systems, Inc. is a world leader in the design, manufacture, and marketing of sensor systems that enhance perception and awareness. FLIR's advanced systems and components are used for a wide variety of thermal imaging, situational awareness, and security applications, including airborne and ground-based surveillance, condition monitoring, navigation, recreation, research and development, manufacturing process control, search and rescue, drug interdiction, transportation safety, border and maritime patrol, environmental monitoring, and chemical, biological, radiological, nuclear, and explosives (CBRNE) threat detection. For more information, visit FLIR's web site at www.FLIR.com.

Non-GAAP Financial Measures

In addition to financial measures prepared in accordance with generally accepted accounting principles (GAAP), this earnings release makes reference to non-GAAP measures. With respect to the outlook for the full year 2017, certain items that affect GAAP net income per diluted share are out of the Company's control and/or cannot be reasonably predicted. Consequently, the Company is unable to provide a reasonable estimate of GAAP net income per diluted share or a corresponding reconciliation to GAAP net income per diluted share for the full year. Additional information regarding the reasons the Company uses non-GAAP measures, a reconciliation of these measures to the most directly comparable GAAP measures, and other information relating to these measures are included below, following the GAAP financial information.

Forward-Looking Statements

Statements in this release by Andy Teich and the statements in the section captioned "Revenue and Earnings Outlook for 2017" above are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements that are not statements of historical fact (including statements containing the words "believes," "plans," "anticipates," "expects," "estimates," or similar expressions) should be considered to be forward looking statements. Such statements are based on current expectations, estimates, and projections about FLIR's business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including the following: changes in demand for FLIR's products, product mix, the timing of customer orders and deliveries, the impact of competitive products and pricing, the impact of FLIR's continuing compliance with U.S. export control laws and regulations and similar laws and regulations, the timely receipt of any necessary export licenses, constraints on supplies of critical components, excess or shortage of production capacity, the ability to manufacture and ship the products in the time period required, actual purchases under agreements, the continuing eligibility of FLIR to act as a federal contractor, the amount and availability of appropriated government procurement funds and other risks discussed from time to time in filings and reports filed with the Securities and Exchange Commission. In addition, such statements could be affected by general industry and market conditions and growth rates, and general domestic and international economic conditions. Such forward-looking statements speak only as of the date on which they are made and FLIR does not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this release, or for changes made to this document by wire services or internet service providers.

   
   
FLIR SYSTEMS, INC.  
CONSOLIDATED STATEMENTS OF INCOME  
(In thousands, except per share amounts)(Unaudited)  
                         
    Three Months Ended     Twelve Months Ended  
    December 31,     December 31,  
    2016     2015     2016     2015  
                         
Revenue   $ 474,738     $ 437,647     $ 1,662,167     $ 1,557,067  
Cost of goods sold     260,005       230,337       895,046       803,506  
  Gross profit     214,733       207,310       767,121       753,561  
                                 
Operating expenses:                                
  Research and development     38,444       31,994       147,537       132,892  
  Selling, general and administrative     83,795       81,553       322,435       313,544  
  Restructuring expenses     214       266       1,431       1,361  
    Total operating expenses     122,453       113,813       471,403       447,797  
                                 
    Earnings from operations     92,280       93,497       295,718       305,764  
                                 
Interest expense     4,528       3,397       18,071       14,086  
Interest income     (478 )     (306 )     (1,402 )     (1,167 )
Other expense (income), net     2,954       (14,376 )     3,092       (12,601 )
                                 
    Earnings before income taxes     85,276       104,782       275,957       305,446  
                                 
Income tax provision     23,776       34,578       109,331       63,760  
                                 
    Net earnings   $ 61,500     $ 70,204     $ 166,626     $ 241,686  
                                 
Earnings per share:                                
  Basic   $ 0.45     $ 0.51     $ 1.22     $ 1.73  
  Diluted   $ 0.45     $ 0.51     $ 1.20     $ 1.72  
                                 
Weighted average shares outstanding:                                
  Basic     136,242       138,000       137,138       139,353  
  Diluted     137,543       138,970       138,497       140,774  
                                 
                                 
FLIR SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)(Unaudited)
         
    December 31,   December 31,
    2016   2015
ASSETS        
         
Current assets:            
  Cash and cash equivalents   $ 361,349   $ 472,785
  Accounts receivable, net     352,020     326,098
  Inventories     371,371     393,092
  Prepaid expenses and other current assets     79,917     95,539
    Total current assets     1,164,657     1,287,514
             
Property and equipment, net     271,785     272,629
Deferred income taxes, net     45,243     55,429
Goodwill     801,406     596,316
Intangible assets, net     168,460     141,302
Other assets     168,155     53,210
    $ 2,619,706   $ 2,406,400
             
LIABILITIES AND SHAREHOLDERS' EQUITY            
             
Current liabilities:            
  Accounts payable   $ 114,225   $ 139,540
  Deferred revenue     34,420     31,933
  Accrued payroll and related liabilities     52,874     54,806
  Accrued expenses     34,022     40,930
  Accrued income taxes     51,017     201
  Other current liabilities     60,154     53,241
  Current portion long-term debt     15,000     264,694
    Total current liabilities     361,712     585,345
             
Long-term debt     501,921     93,750
Deferred income taxes     2,331     3,623
Accrued income taxes     9,643     10,457
Other long-term liabilities     65,773     63,710
             
Commitments and contingencies            
             
Shareholders' equity     1,678,326     1,649,515
    $ 2,619,706   $ 2,406,400
             
             
FLIR SYSTEMS, INC.  
CONSOLIDATED STATEMENTS OF CASH FLOWS  
(In thousands)(Unaudited)  
                         
    Three Months Ended     Twelve Months Ended  
    December 31,     December 31,  
    2016     2015     2016     2015  
                         
Cash flows from operating activities:                                
  Net earnings   $ 61,500     $ 70,204     $ 166,626     $ 241,686  
  Income items not affecting cash:                                
    Depreciation and amortization     15,656       13,069       57,513       49,534  
    Deferred income taxes     5,813       20,101       5,613       2,863  
    Stock-based compensation                                
      arrangements     6,544       6,299       27,797       25,748  
  Gain on sale of certain assets, net     -       (20,211 )     -       (19,166 )
  Other non-cash items     (7,838 )     3,376       11,992       7,722  
  Changes in operating assets and liabilities,                                
    net of acquisitions     15,378       (14,503 )     42,739       (32,573 )
Cash provided by operating activities     97,053       78,335       312,280       275,814  
                                 
Cash flows from investing activities:                                
  Additions to property and equipment     (8,258 )     (18,118 )     (35,940 )     (68,234 )
  Proceeds from sale of property and                                
    equipment     345       25,649       7,331       25,649  
  Business acquisitions, net of cash acquired     (376,758 )     (92,260 )     (419,203 )     (92,260 )
Cash used by investing activities     (384,671 )     (84,729 )     (447,812 )     (134,845 )
                                 
Cash flows from financing activities:                                
  Net proceeds from credit agreement                                
    and long-term debt     (266 )     -       524,560       -  
  Repayments of credit agreement and long-term debt     -       (3,750 )     (367,435 )     (15,000 )
  Repurchase of common stock     -       (29,812 )     (66,057 )     (123,193 )
  Dividends paid     (16,356 )     (15,206 )     (65,920 )     (61,399 )
  Proceeds from shares issued pursuant                                
    to stock-based compensation plans     4,619       3,647       11,966       24,835  
  Excess tax benefit of stock options exercised     (125 )     4,027       1,480       8,243  
  Other financing activities     3       (14 )     13       (24 )
Cash (used) provided by financing activities     (12,125 )     (41,108 )     38,607       (166,538 )
                                 
Effect of exchange rate changes on cash     (16,596 )     (5,089 )     (14,511 )     (33,020 )
                                 
Net (decrease) in cash and cash equivalents     (316,339 )     (52,591 )     (111,436 )     (58,589 )
Cash and cash equivalents:                                
  Beginning of period     677,688       525,376       472,785       531,374  
  End of period   $ 361,349     $ 472,785     $ 361,349     $ 472,785  
                                 
                                 
FLIR SYSTEMS, INC.  
REVENUE AND EARNINGS FROM OPERATIONS BY SEGMENT  
(In thousands)(Unaudited)  
                         
    Three Months Ended     Twelve Months Ended  
    December 31,     December 31,  
    2016     2015     2016     2015  
REVENUE                                
  Surveillance   $ 158,484     $ 150,733     $ 532,476     $ 503,045  
  Instruments     95,981       98,599       336,141       347,476  
  Security     73,138       68,390       240,010       226,575  
  OEM & Emerging Markets     76,134       49,154       243,678       186,722  
  Maritime     38,256       36,026       185,726       177,948  
  Detection     32,745       34,745       124,136       115,301  
    $ 474,738     $ 437,647     $ 1,662,167     $ 1,557,067  
                                 
EARNINGS (LOSS) FROM OPERATIONS                                
  Surveillance   $ 45,104     $ 49,173     $ 144,905     $ 145,637  
  Instruments     31,052       34,394       96,691       112,353  
  Security     7,645       9,229       10,172       28,140  
  OEM & Emerging Markets     13,623       7,558       59,686       41,065  
  Maritime     1,318       553       15,428       13,611  
  Detection     9,363       9,555       33,847       26,904  
  Other     (15,825 )     (16,965 )     (65,011 )     (61,946 )
    $ 92,280     $ 93,497     $ 295,718     $ 305,764  
                                 
ADJUSTED EARNINGS (LOSS) FROM OPERATIONS                                
  Surveillance   $ 47,627     $ 50,065     $ 151,515     $ 149,561  
  Instruments     31,522       35,056       98,776       115,116  
  Security     8,859       9,496       15,884       29,368  
  OEM & Emerging Markets     18,067       8,236       66,247       43,766  
  Maritime     2,082       1,367       18,564       17,382  
  Detection     9,723       10,403       35,287       30,278  
  Other     (14,609 )     (15,958 )     (61,584 )     (60,478 )
    $ 103,271     $ 98,665     $ 324,689     $ 324,993  
                                 
                                 
FLIR SYSTEMS, INC.  
GAAP TO NON-GAAP RECONCILIATION - AS PREVIOUSLY GUIDED  
(In thousands, except per share amounts)(Unaudited)  
                     
                     
    Three Months Ended     Twelve Months Ended  
    December 31,     December 31,  
Earnings per diluted share as previously guided:   2016   2015     2016   2015  
  GAAP diluted earnings per share   $ 0.45   $ 0.51     $ 1.20   $ 1.72  
    SkyWatch product repair charge     0.00     -       0.01     -  
    Restructuring charges     0.00     0.00       0.01     0.01  
    Net loss from businesses acquired in fourth quarter 2016     0.02     -       0.02     -  
    Write-down of cost-basis investment     -     -       0.01     -  
    Gain on sale of cost-basis investment     -     (0.09 )     -     (0.09 )
    Discrete tax items, net     0.01     0.05       0.31     (0.08 )
  Historical-method adjusted diluted earnings per share   $ 0.48   $ 0.47     $ 1.56   $ 1.56  
                             
Weighted average shares outstanding:                            
  Diluted     137,543     138,970       138,497     140,774  
                             
                             
FLIR SYSTEMS, INC.  
GAAP TO NON-GAAP RECONCILIATION  
(In thousands, except per share amounts)(Unaudited)  
                         
                         
    Three Months Ended     Twelve Months Ended  
    December 31,     December 31,  
    2016     2015     2016     2015  
Gross profit:                                
  GAAP gross profit   $ 214,733     $ 207,310     $ 767,121     $ 753,561  
    Amortization of acquired intangibles assets     2,730       1,516       9,540       6,582  
    Purchase accounting adjustments     3,093       -       3,093       -  
    Other     500       -       2,500       -  
  Adjusted gross profit   $ 221,056     $ 208,826     $ 782,254     $ 760,143  
                                 
Gross margin:                                
  GAAP gross margin     45.2 %     47.4 %     46.2 %     48.4 %
    Cumulative effect of non-GAAP Adjustments     1.4 %     0.3 %     0.9 %     0.4 %
  Adjusted gross margin     46.6 %     47.7 %     47.1 %     48.8 %
                                 
Operating income:                                
  GAAP operating income   $ 92,280     $ 93,497     $ 295,718     $ 305,764  
    Amortization of acquired intangibles assets     5,831       3,895       18,383       16,400  
    Purchase accounting adjustments     3,093       -       3,093       -  
    Restructuring charges     214       266       1,431       1,361  
    Other     500       -       2,500       -  
    Acquisition related expenses     1,353       1,007       3,564       1,468  
  Adjusted operating income   $ 103,271     $ 98,665     $ 324,689     $ 324,993  
                                 
Operating margin:                                
  GAAP operating margin     19.4 %     21.4 %     17.8 %     19.6 %
    Cumulative effect of non-GAAP Adjustments     2.4 %     1.1 %     1.7 %     1.3 %
  Adjusted operating margin     21.8 %     22.5 %     19.5 %     20.9 %
                                 
Net income:                                
  GAAP net income   $ 61,500     $ 70,204     $ 166,626     $ 241,686  
    Amortization of acquired intangibles assets     5,831       3,895       18,383       16,400  
    Purchase accounting adjustments     3,093       -       3,093       -  
    Restructuring charges     214       266       1,431       1,361  
    Other     500       -       3,761       -  
    Acquisition related expenses     1,353       1,007       3,564       1,468  
    (Gain) or loss on cost-basis investments     -       (20,200 )     2,000       (20,200 )
    Estimated tax (benefit) expense of non-GAAP adjustments     (2,748 )     6,234       (7,558 )     2,859  
    Discrete tax items, net     2,133       8,213       42,591       (10,812 )
  Adjusted net income   $ 71,876     $ 69,619     $ 233,891     $ 232,762  
                                 
Earnings Per Diluted Share:                                
  GAAP Earnings Per Diluted Share   $ 0.45     $ 0.51     $ 1.20     $ 1.72  
    Cumulative effect of non-GAAP Adjustments     0.07       (0.01 )     0.49       (0.07 )
  Adjusted Earnings Per Diluted Share   $ 0.52     $ 0.50     $ 1.69     $ 1.65  
                                 
Weighted average shares outstanding:                                
  Diluted     137,543       138,970       138,497       140,774  
                                 
                                 
FLIR SYSTEMS, INC.  
GAAP TO NON-GAAP RECONCILIATION  
(In thousands)(Unaudited)  
                         
                         
    Three Months Ended     Twelve Months Ended  
    December 31,     December 31,  
    2016     2015     2016     2015  
Surveillance                                
  Operating Income as reported   $ 45,104     $ 49,173     $ 144,905     $ 145,637  
    Amortization of acquired intangibles assets     1,415       892       3,424       3,698  
    Purchase accounting adjustments     579       -       579       -  
    Restructuring charges     29       -       107       226  
    Other     500       -       2,500       -  
  Adjusted Operating Income   $ 47,627     $ 50,065     $ 151,515     $ 149,561  
                                 
                                 
Instruments                                
  Operating Income as reported   $ 31,052     $ 34,394     $ 96,691     $ 112,353  
    Amortization of acquired intangibles assets     398       398       1,592       1,594  
    Restructuring charges     72       264       493       1,169  
  Adjusted Operating Income   $ 31,522     $ 35,056     $ 98,776     $ 115,116  
                                 
                                 
Security                                
  Operating Income as reported   $ 7,645     $ 9,229     $ 10,172     $ 28,140  
    Amortization of acquired intangibles assets     1,102       267       4,946       1,228  
    Restructuring charges     112       -       766       -  
  Adjusted Operating Income   $ 8,859     $ 9,496     $ 15,884     $ 29,368  
                                 
                                 
OEM & Emerging                                
  Operating Income as reported   $ 13,623     $ 7,558     $ 59,686     $ 41,065  
    Amortization of acquired intangibles assets     1,792       678       3,845       2,723  
    Purchase accounting adjustments     2,514       -       2,514       -  
    Restructuring charges     1       -       65       (22 )
    Acquisition related expenses     137       -       137       -  
  Adjusted Operating Income   $ 18,067     $ 8,236     $ 66,247     $ 43,766  
                                 
                                 
Maritime                                
  Operating Income as reported   $ 1,318     $ 553     $ 15,428     $ 13,611  
    Amortization of acquired intangibles assets     764       814       3,136       3,771  
  Adjusted Operating Income   $ 2,082     $ 1,367     $ 18,564     $ 17,382  
                                 
                                 
Detection                                
  Operating Income as reported   $ 9,363     $ 9,555     $ 33,847     $ 26,904  
    Amortization of acquired intangibles assets     360       846       1,440       3,386  
    Restructuring charges     -       2       -       (12 )
  Adjusted Operating Income   $ 9,723     $ 10,403     $ 35,287     $ 30,278  
                                 
                                 
Other                                
  Operating Income as reported   $ (15,825 )   $ (16,965 )   $ (65,011 )   $ (61,946 )
    Acquisition related expenses     1,216       1,007       3,427       1,468  
  Adjusted Operating Income   $ (14,609 )   $ (15,958 )   $ (61,584 )   $ (60,478 )
                                 
                                 

Explanation of Non-GAAP Financial Measures

We report our financial results in accordance with United States generally accepted accounting principles (GAAP). As a supplement to our GAAP financial results, this earnings announcement contains some or all of the following non-GAAP financial measures: (i) adjusted gross profit, (ii) adjusted gross margin (defined as adjusted gross profit divided by revenue), (iii) adjusted operating income, (iv) adjusted operating margin (defined as adjusted operating income divided by revenue), (v) adjusted net income, and (vi) adjusted earnings per diluted share (EPS). These non-GAAP measures of financial performance are not prepared in accordance with GAAP and computational methods may differ from those used by other companies. Additionally, these non-GAAP measures should not be considered a substitute for any other performance measure determined in accordance with GAAP and the Company cautions investors and potential investors to consider these measures in addition to, not as a substitute for, its consolidated financial results as presented in accordance with GAAP. Each of the non-GAAP measures is adjusted from GAAP results and are outlined in the "GAAP to Non-GAAP Reconciliation" tables included within this earnings release.

In calculating non-GAAP financial measures, we exclude certain items (including gains and losses) to facilitate a review of the comparability of our core operating performance on a period-to-period basis. The excluded items represent amortization of acquired intangible assets, purchase accounting adjustments, restructuring charges, acquisition related expenses, gains and losses on cost-basis investments, discrete tax items, and other items we do not consider to be directly related to our core operating performance. We use non-GAAP measures internally to evaluate the core operating performance of our business, for comparison with forecasts and strategic plans and for calculating return on investment. Accordingly, supplementing GAAP financial results with these non-GAAP financial measures enables the comparison of our ongoing operating results in a manner consistent with the metrics reviewed by management. We believe that these non-GAAP measures, when read in conjunction with our GAAP financials, provide useful information to investors by facilitating:

  • the comparability of our ongoing operating results over the periods presented;
  • the ability to identify trends in our underlying business; and
  • the comparison of our operating results against analyst financial models and operating results of other public companies that supplement their GAAP results with non-GAAP financial measures.

The following are explanations of each type of adjustment that we incorporate into non-GAAP financial measures:

  • Amortization of acquired intangible assets. GAAP accounting requires that intangible assets are recorded at fair value as of the date of acquisition and amortized over their estimated useful lives. The timing and magnitude of our acquisition transactions and maturities of the businesses acquired will cause our operating results to vary from period to period, making comparison to past performance difficult for investors. We exclude amortization of acquired intangible assets from our non-GAAP measures because management does not believe these costs are representative of our core operating performance.

  • Purchase accounting adjustments. Included in our GAAP financial measures are purchase accounting adjustments, required by GAAP to adjust inventory balances to fair value at the time of acquisition. These non-cash charges are not reflective of our ongoing operations and can vary significantly in any given period driven by variability in our acquisition activity. We exclude purchase accounting adjustments from our non-GAAP measures because management does not believe these costs are representative of our core operating performance.

  • Acquisition related expenses. Included in our GAAP financial measures are acquisition related expenses, consisting of external expenses resulting directly from acquisition related activities, including due diligence, legal, valuation, tax and audit services. The timing and nature of our acquisition activity can vary significantly from period to period impacting comparability of operating results from one period to another. These one-time costs can vary significantly in amount and timing and are not indicative of our core operating performance.

  • Restructuring charges. Included in our GAAP financial measures are restructuring charges which are primarily for employee compensation resulting from reductions in employee headcount and facilities exit and lease termination costs in connection with Company reorganization and restructuring activities. We believe that excluding these costs provides greater visibility to the underlying performance of our business operations, facilitates comparison of our results with other periods, and facilitates comparison with the results of other companies in our industry.

  • Gain or loss on cost-basis investments. Included in our GAAP financial measures, are gains or losses from cost-basis investments. As these gains and losses can vary significantly from period to period and do not constitute part of our ongoing operations, we exclude these items from our non-GAAP measures.

  • Other. Other charges include product remediation charges associated with certain SkyWatch™ surveillance towers and the loss on extinguishment of debt. We exclude other charges from our non-GAAP measures because we do not believe such costs accurately reflect the performance of our ongoing operations.

  • Estimated tax effect of non-GAAP adjustments. This amount adjusts the provision for income taxes to reflect the effect of the previously listed non-GAAP adjustments on non-GAAP net income. We estimate the tax effect of the adjustment items by applying the Company's overall estimated effective tax rate, excluding significant discrete items, to the pretax amount.

  • Discrete tax items, net. Included in our GAAP financial measures are income tax expenses and benefits related to discrete events or transactions that are not representative of the Company's estimated tax rate related to ongoing operations. These discrete tax items can vary significantly from period to period impacting the comparability of our earnings from one period to another. Discrete tax items include charges and reversals of provisions associated with certain unrecognized tax benefits, benefits associated with the reversal of previously recorded valuation allowances against certain deferred tax assets, and other discrete items not included in the annual effective tax rate associated with our ongoing operations. We exclude discrete tax items from our non-GAAP measures because we do not believe such expenses or benefits reflect the performance of our ongoing operations.

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