Adjusted measures

The Company provides additional financial information on an adjusted basis. The non-GAAP income statement excludes one-off expenses and reorganization charges incurred in connection with the Combination with Gemplus and the acquisitions realized thereafter, and charges resulting from the accounting treatment of the Combination with Gemplus and the acquisitions realized thereafter.

Following the Combination with Gemplus and acquisitions realized thereafter, Gemalto’s financial statements have undergone significant changes, due in particular to the accounting treatment of these transactions in accordance with IFRS 3 ‘Business combination’. To supplement the financial statements presented on an IFRS basis, the Group presents adjusted financial information (unaudited and not in conformity with IFRS) which excludes certain business combination accounting entries and expenses directly incurred in connection with the Combination with Gemplus and following the acquisitions realized thereafter.

The Group believes that this information is helpful in understanding its past financial performance and its future results. Adjusted financial measures are not meant to be considered in isolation or as a substitute for comparable IFRS measures, and should be read only in conjunction with consolidated financial statements prepared in accordance with IFRS. Management regularly uses these supplemental adjusted financial measures internally to understand, manage and evaluate the business and take operating decisions. These adjusted measures are among the primary factors management uses in planning for and forecasting future periods. Compensation of executives is based in part on the performance of the business based on these adjusted measures

Adjustments to IFRS income statement  
Combination-related charges In 2006, Gemalto incurred material expenses in connection with the Combination with Gemplus, which it would not have otherwise incurred. Combination-related charges consist of professional advisory services incurred in connection with the integration, new Gemalto brand and logo creation and worldwide registration, as well as impairment charges related to capitalized development costs capitalized development costs on projects which are redundant having regard to existing products or technologies available in Gemplus. Gemalto also determined that its investment in a listed company was impaired as a consequence of the Combination with Gemplus. The related impairment charge was recorded in Financial income (loss) in the first half of 2006.
Reorganization charges Charges incurred in connection with headcount reductions in the support functions, the consolidation of manufacturing and office sites (including property, plant and equipment, intangible asset and inventory write-offs and impairment, asset transfer costs, under- absorption costs linked to plant closure, employee benefits, severance and associated costs, lease termination and building refurbishment cost) and the rationalization and harmonization of IT systems and of the product and service portfolio.
Amortization and depreciation of intagible assets Amortization and depreciation of intangible assets recognized as a result of the Combination with Gemplus and the acquisitions thereafter have been excluded from the adjusted profit for the period. Investors should note that the use of intangible assets contributed to revenue earned during the period and will contribute to future revenue generation and that these amortization expenses will be recurring.
Additional stock-based compensation Additional stock-based compensation specifically due to the accounting treatment of the Combination: as prescribed by IFRS 2 ‘Share-based payment’ and IFRS 3 ‘Business Combination’, vested and unvested stock options or awards granted by an acquirer in exchange for stock options or awards held by employees of the purchased company, or any substantially equivalent commitment by the acquirer to assume the obligations of the acquiree with regards to stock options granted to the latter’s employees, as is the case for Gemalto under the Combination Agreement, shall be considered to be part of the purchase price for the acquirer, and the fair value (at the effective date of the acquisition or merger) of the new (acquirer) awards shall be included in the purchase price. It leads to an increase in the compensation charge related to stock-options granted by Gemplus prior to the acquisition. The adjustment, eliminating the additional stock-based compensation charge, is intended to reflect the compensation charge that Gemplus would expense if the company had continued to operate on a standalone basis. The Group believes this adjustment is useful to investors as a measure of the ongoing performance of its business.

 

Reconciliation between IFRS and adjusted income statement

In thousands of Euro IFRS income statement for the 12 month period Adjustment relating to Combination- related expenses Adjustment relating to reorganization charges Adjusting relating to amortization and impairment of intangible assets and inventory step-up Other adjustments Adjusted income statement for the 12 month period
 
  Year ended December 31, 2009
Sales 1,654,247       122 1,654,369
Cost of sales (1,054,230)         (1,054,230)
Gross profit 600,017       122 600,139
Research & Engineering expenses (97,852)       452 (97,400)
Sales & Marketing expenses (235,418)         (235,418)
General & Administrative expenses (101,421)       661 (100,760)
Other operating expenses 4,026         4,026
Combination-related expenses           –
Reorganization expenses (9,316)   9,316     –
Amortization and impairment of intangible assets (23,699)     23,699   –
Operating income 136,337   9,316 23,699 1,235 170,587
Financial income (2,246)         (2,246)
Share of profit of associates 1,380         1,380
Gain on sale of an investment in associate 78         78
Profit before taxes 135,549   9,316 23,699 1,235 169,800
Income tax (17,425)     (4,222)   (21,651)
Profit for the period 118,124   9,316 19,478 1,235 148,149
 
  Year ended December 31, 2008
Sales 1,680,526   (652)     1,679,874
Cost of sales (1,091,220)   7,984 150 34 (1,083,052)
Gross profit 589,306   7,332 150 34 596,822
Research & Engineering expenses (94,934)       3 (94,931)
Sales & Marketing expenses (232,505)       77 (232,428)
General & Administrative expenses (101,972)       44 (101,928)
Other operating expenses 1,737         1,737
Combination-related expenses 86 (86)       –
Reorganization expenses (20,911)   20,911     –
Amortization and impairment of intangible assets (13,743)     13,743   –
Operating income 127,064 (86) 28,243 13,893 158 169,272
Financial income 2,139         2,139
Share of profit of associates 2,350         2,350
Gain on sale of an investment in associate 195         195
Profit before taxes 131,748 (86) 28,243 13,893 158 173,956
Income tax (16,845)     (4,130)   (20,975)
Profit (loss) for the period 114,903 (86) 28,243 9,763 158 152,891