UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[x]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 5, 2013

OR

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 000-29617

INTERSIL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.            x            Yes            ¨            No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period the registrant was required to submit and post such files).                        x            Yes            ¨            No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).¨YesxNo

The number of shares outstanding of the issuer’s classes of common stock as of the close of business on  August 2, 2013:

 

 

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INTERSIL CORPORATION

INDEX

 

 

 

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PART I-FINANCIAL INFORMATION

Item 1.            Financial Statements.

INTERSIL CORPORATION 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

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INTERSIL CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

 

 

 

 

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INTERSIL CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

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INTERSIL CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 

 

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INTERSIL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1—Basis of Presentation

 

Intersil Corporation (“Intersil,” which may also be referred to as “we,” “us” or “our”) designs, develops, manufactures and markets high-performance analog, mixed-signal, and power management integrated circuits (“ICs”) for applications in the global industrial & infrastructure, consumer, and personal computing electronics markets.

 

In our opinion, these interim unaudited condensed consolidated financial statements include all adjustments necessary to present fairly, in all material respects, the financial position, results of operations and cash flows for all periods presented. We prepared these unaudited condensed consolidated financial statements in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, using management estimates where necessary. We derived the December 28, 2012 consolidated balance sheet from our audited consolidated year-end financial statements. You should read this interim report in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 28, 2012.

 

We utilize a 52/53 week fiscal year, ending on the nearest Friday to December 31. Fiscal year 2013 is a 53 week period with an extra week included in our second quarter. Quarterly or annual periods vary from exact calendar quarters or years.

 

Past financial performance may not be indicative of future financial performance for any other interim period or for the full fiscal year. The Consumer and Personal Computing markets have historically experienced weaker demand in the first and second fiscal quarters and stronger demand in the third and fourth fiscal quarters. However, macroeconomic conditions, acquisitions and the cyclical nature of the industry have had a greater impact on quarterly fluctuations in recent years.

 

Certain prior year amounts have been reclassified to conform to current year presentation.

 

 

Note 2 — Investments and Fair Value Measurements

 

Investments

 

We classify bank time deposits as available for sale (“AFS”) and record them at fair value.

 

We have no unrealized gains or losses on AFS investments recorded in accumulated other comprehensive income (loss) as of July 5, 2013 or December 28, 2012.  

 

We recognized  a gain of $0.6 million in our consolidated statements of operations during the quarter and two quarters ended July 5, 2013 related to the recovery of previously recognized losses on auction rate securities. There were no recognized gains or losses on investments included in our consolidated statements of operations during the quarter or two quarters ended June 29, 2012. 

 

Fair Value Measurements

Due to their short duration, the carrying amount of cash and cash equivalents, receivables, prepaid expenses, accounts payable, accrued expenses and other current liabilities provide a reasonable estimate of fair value.

For deferred compensation investments and bank time deposits, we generally rely upon the valuations as provided by the third party custodian of these assets or liabilities.  

We determine the fair value of our assets and liabilities utilizing three levels of inputs, focusing on the most observable level of inputs when available.  Level 1 inputs use quoted prices in active markets which are unadjusted and accessible as of the measurement date for identical, unrestricted assets or liabilities.  Level 2 uses quotes prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.  Level 3 uses prices or valuations that require inputs that are unobservable and significant to the overall fair value measurement.

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We determine fair value on the following assets and liabilities using these input levels (in millions):

 

 

There were no transfers into or out of Level 1 or Level 2 financial assets during the quarters or two quarters ended July 5, 2013 and June 29, 2012.

 

 

 

Note 3 — Inventories

 

Inventories are summarized below (in millions):

 

 

Note 4 — Goodwill and Purchased Intangibles

 

Goodwill — The following table summarizes changes in the goodwill balance for our one reportable segment (in millions):

 

We performed our annual test of impairment as of September  29, 2012, the first day of our fourth quarter of 2012, and determined that the fair value of the reporting units was in excess of the carrying value as of that date.

 

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We will perform our next annual test of impairment in the fourth quarter of 2013 or if indicators of impairment exist, in interim periods. If we experience declines in our stock price, which are considered severe or for more than a short duration, such that our market capitalization is sustained at a value less than our carrying book value of equity, we may need to perform additional analysis in advance of the annual test in the fourth quarter.  In addition, we may incur events or circumstances that might trigger an interim evaluation of impairment of a reporting unit’s goodwill prior to the required annual test. Various factors must be considered, including adverse legal factors, changes in our business climate, unanticipated competition, regulatory issues, loss of key personnel, significant changes or losses in business operations, weakness in our industry, downward revisions to forecasts for future periods, restructuring plans and declines in market capitalization below equity book value. We can provide no assurance that the significant assumptions used in our analysis will not change substantially and any additional analysis could result in additional impairment charges.

 

Purchased Intangibles — Substantially all of our purchased intangibles consist of multiple elements of developed technology which have estimated useful lives of five years. Other purchased intangibles consist of other identifiable assets, primarily customer relationships with an estimated useful life of four to seven years (in millions).

 

 

Expected amortization expense by year to the end of the current amortization schedule is as follows (in millions):

 

 

Purchased intangibles were evaluated for impairment during the quarter ended July 5, 2013 and we recognized an impairment charge of $1.8 million on certain developed technology intangibles due to cost reduction initiatives included in our February 2013 restructuring plan (See Note 5).  The impairment charge is included as a component of restructuring and related costs in our consolidated statements of operations.

 

Note 5 — Restructuring

 

On February 15, 2013, our Board of Directors approved a restructuring plan (the “February 2013 plan”) to prioritize our sales and development efforts, strengthen financial performance and improve cash flow. The February 2013 plan includes a reduction of approximately 18% of our worldwide workforce. We recorded restructuring and related costs of $19.6 million for the two quarters ended July 5, 2013. The February 2013 plan is substantially complete.  During 2012, we initiated restructuring plans to reorganize certain operations and reduce our global workforce and other operating costs. The 2012 restructuring plans were substantially completed at the end of the fourth quarter of 2012.  No further expense related to these plans is anticipated.

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The amounts below relating to the restructuring are included in accrued restructuring on our consolidated balance sheets (in millions): 

 

Other costs include certain prepaid, intangible and other assets that were written off as a result of the restructuring initiative.

 

See Note 13 — Subsequent Events for information related to a restructuring plan adopted on July 24, 2013, not included above.

 

Note 6 — Income Taxes

 

We include income taxes for the interim periods in the accompanying financial statements on the basis of an estimated annual effective tax rate. As of July 5, 2013, the estimated annual effective tax rate for 2013 is approximately 100%, which differs from the 35% statutory corporate tax rate primarily due to lower statutory tax rates applicable to our operations in many of the foreign jurisdictions in which we operate.  The impact of this foreign rate differential will beneficially or adversely impact the effective tax rate dependent upon the financial results of those foreign operations. Furthermore, significant drivers of the estimated annual tax rate for 2013 include the benefit of the U.S. research & development credit, offset by the impact of certain permanently non-deductible items, such as stock based compensation associated with our cost sharing arrangement.  The actual year to date 2013 tax provision also includes a $5.7 million discrete tax benefit associated with the reinstatement of the federal research tax credit retroactive to the beginning of 2012 as well as discrete tax charge of $2.1 million related to tax deficiencies in share based compensation.

 

The table below summarizes activity in unrecognized tax benefits (“UTBs”) (in millions):

The increase in UTBs related to prior year tax positions is due mainly to accrued interest on the UTBs.  The balance in UTBs is primarily related to transfer pricing and a provision established related to an Internal Revenue Service (“IRS”) examination for tax years 2008-2009.

We continue to be under IRS examination related to tax years 2008 and 2009.  We have made substantial progress with the IRS this quarter; however, as the final resolution of the examination process remains uncertain for those years, we continue to provide for the uncertain tax positions based on our best estimate of the ultimate outcome.

 

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Within the next 12 months, we estimate that our UTB balance will be reduced by approximately $0.5 million related to the state tax impact of the settlement with the IRS for tax years 2005-2007,  $25.0 million related to the federal and state tax impact of the settlement with the IRS for tax years 2008-2009, and $2.8 million due to the expiration of the statute of limitation on certain items. 

 

Hypothetical Additional Paid in Capital (“APIC”) Pool—The hypothetical APIC pool represents the excess tax benefits related to share-based compensation that are available to absorb future tax deficiencies.  If the amount of tax deficiencies is greater than the available hypothetical APIC pool, we record the excess as income tax expense in our consolidated statements of operations.  During the quarter and two quarters ended July 5, 2013, we recognized $1.5 million and $2.1 million, respectively, of income tax expense resulting from tax deficiencies related to share-based compensation in our consolidated statements of operations. We did not recognize any tax expense resulting from tax deficiencies during the two quarters ended June 29, 2012.

 

Note 7 — Long-Term Debt

We have a  five-year, $325.0 million revolving credit facility (the “Facility”) that matures on September 1, 2016 and is payable in full upon maturity. Under the Facility, $25.0 million is available for the issuance of standby letters of credit, $10.0 million is available as swing line loans and $50.0 million is available for multicurrency borrowings. Amounts repaid under the Facility may be reborrowed. We currently do not have any outstanding borrowings under the Facility. For the two quarters ended June 29, 2012, we paid $2.1 million in interest related to outstanding debt.

 

Standby Letters of Credit — We issue standby letters of credit during the ordinary course of business through major financial institutions as required for certain regulatory matters.  We had outstanding letters of credit totaling $1.4 million as of July 5, 2013, and $2.2 million as of December 28, 2012. The standby letters of credit are secured by short-term bank time deposits. 

 

Note 8 — Common Stock and Dividends

 

Dividends — On April 24, 2013, our Board of Directors declared a dividend of $0.12 per share of common stock resulting in paid dividends of $15.9 million on May 24, 2013, to shareholders of record as of the close of business on May 14, 2013. On July 29, 2013, our Board of Directors declared a dividend of $0.12 per share of common stock to be paid on August 30, 2013, to shareholders of record as of the close of business on August 20, 2013. 

 

Class A Common Stock — Share activity for Class A common stock since December 28, 2012 (in thousands):

 

On August 6, 2012, our Board of Directors authorized the repurchase of up to $50.0 million of Intersil’s common stock. The stock repurchase program expired on August 6, 2013 and no further shares may be repurchased under the plan. We repurchased 1.9 million shares under the program at an average price of $8.03 per share. During the two quarters ended July 5, 2013, we did not repurchase any shares under the program.

 

Note 9 — Equity-based Compensation

 

Grant Date Fair Values and Underlying Assumptions — For options granted, we estimated the fair value of each stock option (“Option”) as of the grant with the following assumptions:

 

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The following table represents the weighted-average fair value compensation cost per share of stock options and restricted and deferred stock awards (“Awards”) granted:

 

Equity-based Compensation Summary — The following table presents information about Options and Awards as of July 5, 2013 and activity for the two quarters ended.

 

 

(1)  Awards exercised are those that have reached full vested status and have been delivered to the recipients as a taxable event due to elective deferral, available in the case of deferred stock units. Deferred stock units for which the deferral is elected timely are vested but still outstanding as Awards. Total un-issued shares related to deferred stock units as of July 5, 2013 were 74,000 shares as shown in the Awards column as Exercisable/vested.

 

 

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Financial Statement Effects and Presentation — The following table shows total equity-based compensation expense for the periods indicated that are included in our consolidated statements of operations (in millions):

 

 

 

Market and Performance-based Grants — As of July 5, 2013, we had Options and Awards outstanding that include the usual service conditions as well as (1) market conditions related to total shareholder return and (2) performance conditions relating to revenue and operating income relative to peer companies. Under the terms of the agreements, participants may receive from 0 - 200% of the original grant. Stock-based compensation cost is measured at the grant date, based on the fair value of the number of shares ultimately expected to vest, and is recognized as an expense, on a straight line basis, over the requisite service period (shares in thousands):

 

 

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Note 10 — Earnings (Loss) Per Share

 

The following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands, except per share amounts):

 

 

Note 11 — Segment Information

 

We report our results in one reportable segment. We design, develop, manufacture and market high-performance analog, mixed-signal and power management ICs. Our chief executive officer is our chief operating decision-maker.

 

Note 12 — Legal Matters and Indemnifications

 

Legal Matters — We are currently party to various claims and legal proceedings. In our opinion, no material loss is anticipated from such claims and proceedings.

 

Indemnifications — We incur indemnification obligations for intellectual property infringement claims related to our products. We accrue for known indemnification issues and estimate unidentified issues based on historical activity.

 

Note 13 — Subsequent Events

 

On July 24, 2013, we adopted a resource rebalancing plan to better align operating expenses with strategic growth areas to improve competitiveness and execution across the business. The plan includes a reduction of the workforce by approximately 150 employees, with resulting restructuring-related charges of $8 million to $12 million, including severance costs of approximately $6 million to $9 million, to be recorded in our third quarter of 2013. The remainder relates to lease impairment charges, primarily costs to consolidate facilities in North America.

 

—End of Unaudited Condensed Consolidated Financial Statements—

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Item 2.          Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

You should read the following discussion in conjunction with our unaudited condensed consolidated financial statements, including the notes thereto. Except for historical information, the discussions in this section contain forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed below.

 

Forward Looking Statements

This Quarterly Report on Form 10-Q  contains statements relating to expected future results and business trends of Intersil Corporation (“Intersil” which may also be referred to as “we,” “us” or “our”) that are based upon our current estimates, expectations, assumptions and projections about our industry, as well as upon certain views and beliefs held by management, that are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements generally can be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “will be,” “will continue,” “will likely result,” and similar expressions. In addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances, including any underlying assumptions, are “forward-looking statements.” These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. These factors include, but are not limited to:

 

These “forward-looking statements” are made only as of the date hereof, and we undertake no obligation to update or revise the “forward-looking statements,” whether as a result of new information, future events or otherwise.

 

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Overview

 

We design, develop, manufacture and market high-performance analog, mixed-signal, and power management integrated circuits (“ICs”). We believe our product portfolio addresses some of the largest opportunities within the industrial & infrastructure, consumer and personal computing electronics markets.

 

Critical Accounting Policies

 

You should refer to the disclosures regarding critical accounting policies in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 28, 2012.

 

We will perform our next annual test of goodwill impairment in the fourth quarter of 2013 or if indicators of impairment exist, in interim periods. If we experience declines in our stock price, which are considered severe or for more than a short duration, such that our market capitalization is sustained at a value less than our carrying book value of equity, we may need to perform additional analysis in advance of the annual test in the fourth quarter.  In addition, we may incur events or circumstances that might trigger an interim evaluation of impairment of a reporting unit’s goodwill prior to the required annual test. Various factors must be considered, including adverse legal factors, changes in our business climate, unanticipated competition, regulatory issues, loss of key personnel, significant changes or losses in business operations, weakness in our industry, downward revisions to forecasts for future periods, restructuring plans and declines in market capitalization below equity book value. We can provide no assurance that the significant assumptions used in our analysis will not change substantially and any additional analysis could result in additional impairment charges. See additional disclosures regarding the judgments and estimates related to the assessment of recoverability of goodwill in our Annual Report on Form 10-K for the fiscal year ended December 28, 2012.

 

Results of Operations

 

Consolidated statements of operations data and percentage of revenue for the periods:

 

 

Fiscal year 2013 is a 53 week period with an extra week included in our second quarter.

 

Revenue and Gross Margin

 

Revenue decreased $18.2 million or 11.1% to $144.8 million during the quarter ended July 5, 2013 from $163.0 million during the quarter ended June 29, 2012. Revenue from the personal computing market decreased 28.5% compared to the quarter ended June 29, 2012, and revenue from the industrial & infrastructure market decreased 9.1%, while revenue from the consumer market increased 7.4%. The quarter ended July 5, 2013 included an extra week.

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Revenue by end market was as follows ($ in millions):

 

 

 

 

 

Revenue decreased $42.4 million or 13.3% to $276.6 million during the two quarters ended July 5, 2013 from $319.0 million during the two quarters ended June 29, 2012. Revenue from the personal computing market decreased 25.0% compared to the two quarters ended June 29, 2012, due to unfavorable PC trends and our reduced market share in the next generation Intel platforms. We expect the decline in our revenues from personal computing market to continue over the next few quarters. Revenue from the industrial & infrastructure market decreased 9.9% and revenue from the consumer market decreased 7.7%. During the third quarter, we expect revenues from our industrial and infrastructure end market to be down slightly on an absolute basis, but up slightly on a run-rate basis, adjusting for the 14-week period in the second fiscal quarter. We expect our revenue from consumer market to grow in the third quarter due to improved demand for our products sold into handsets, tablets and gaming consoles as well as favorable seasonal trends.

 

In aggregate, lower overall unit demand in the quarter ended July 5, 2013, decreased revenue by $12.1 million from the quarter ended June 29, 2012, levels and a decrease in average selling prices (“ASPs”) for the related product mix decreased revenue from the quarter ended June 29, 2012, levels by $6.0 million.

 

Lower overall unit demand in the two quarters ended July 5, 2013, decreased revenue by $23.7 million from the two quarters ended June 29, 2012, levels and a decrease in ASPs for the related product mix decreased revenue from the two quarters ended June 29, 2012, levels by $18.7 million. 

 

Declining sales prices at the product level have occurred within the semiconductor industry for much of its existence. While individual products generally experience ASP declines over time, we endeavor to continually introduce new products which typically enter the market at prices higher than existing products. Fluctuations in ASPs are expected to continue into the future.

 

Geographically, quarter-to-date revenue was derived from the Asia/Pacific, North America and Europe regions as follows ($ in millions):

 

 

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We sell our products to customers in many countries including, in descending order by revenue dollars for our top ten countries, China (including Hong Kong), the United States, South Korea, Germany, Japan, Singapore, Taiwan, Thailand, Mexico and Malaysia. Sales to customers in China (including Hong Kong) comprised approximately 53.5% of revenue, followed by the United States 15.6% and South Korea 6.6% during the two quarters ended July 5, 2013. Two distributors that support a wide range of customers around the world accounted for 17.4% and 12.1% of our revenue in the two quarters ended July 5, 2013, compared to 14.7% and 13.7% of revenue during the two quarters ended June 29, 2012. Two original design manufacturers accounted for 7.8% and 6.4% of our revenue for the two quarters ended July 5, 2013, compared to 8.5% and 7.6% of revenue during the two quarters ended June 29, 2012. 

 

Cost of Revenue and Gross Margin

 

Cost of revenue consists primarily of purchased materials and services, labor, overhead and depreciation associated with manufacturing pertaining to products sold. As a percentage of sales, gross margin was 55.2% during the quarter ended July 5, 2013 compared to 54.5% during the quarter ended June 29, 2012. The increase in gross margin was primarily due to a change in the mix of products sold.

 

As a percentage of sales, gross margin was 54.5% during the two quarters ended July 5, 2013 and remained flat as compared to the two quarters ended June 29, 2012.

 

Operating Costs and Expenses

 

Research and Development (“R&D”)

 

R&D expenses consist primarily of salaries and expenses of employees engaged in product/process research, design and development activities, as well as related subcontracting activities, masks, design automation software, engineering wafers and technology license agreement expenses.

 

R&D expenses decreased $11.8 million or 25.6% to $34.4 million during the quarter ended July 5, 2013 from $46.2 million during the quarter ended June 29, 2012, primarily as a result of lower headcount and other cost reductions from our restructuring actions and lower mask costs. The quarter ended July 5, 2013 included an extra week.

 

R&D expenses decreased $18.8 million or 20.8% to $71.7 million during the two quarters ended July 5, 2013 from $90.6 million during the two quarters ended June 29, 2012, primarily as a result of lower headcount and other cost reductions related to the restructuring actions and lower mask costs.

 

Selling, General and Administrative (“SG&A”)

 

SG&A expenses consist primarily of salaries and expenses of employees engaged in selling and marketing our products as well as the salaries and expenses required to perform our human resources, finance, information systems, legal, executive and other administrative functions.

 

SG&A expenses decreased $7.4 million or 20.4% to $29.0 million during the quarter ended July 5, 2013 from $36.4 million during the quarter ended June 29, 2012. The decrease was driven primarily by cost reduction initiatives primarily in labor and professional fees. The quarter ended July 5, 2013 included an extra week.

 

SG&A expenses decreased $11.3 million or 16.0% to $59.3 million during the two quarters ended July 5, 2013 from $70.6 million during the two quarters ended June 29, 2012. The decrease was driven primarily by cost reduction initiatives primarily in labor and professional fees.

 

Amortization of Purchased Intangibles

 

Amortization of purchased intangibles decreased $0.8 million or 10.7% to $6.4 million during the quarter ended July 5, 2013 from $7.2 million during the quarter ended June 29, 2012. Amortization of purchased intangibles decreased $1.5 million or 10.4% to $12.9 million during the two quarters ended July 5, 2013 from $14.4 million during the two quarters ended June 29, 2012. The decrease was due to certain intangibles that became fully amortized during 2012 and the write-off of certain intangible assets to restructuring and related cost during the current quarter. 

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Restructuring-related Costs

 

Restructuring-related costs were $2.8 million in the quarter ended July 5, 2013 and  $8.3 million during the quarter ended June 29, 2012. Restructuring-related costs were $19.6 million in the two quarters ended July 5, 2013 and $9.8 million during the two quarters ended June 29, 2012. On February 15, 2013, we adopted a restructuring plan (the “February 2013 plan”) to prioritize sales and development efforts, strengthen financial performance and improve cash flow. The February 2013 plan included a reduction of approximately 18% of our worldwide workforce.

 

Other Income and Expenses

 

Interest Income

 

Interest income was minimal for the quarter ended July 5, 2013 and $0.1 million for the quarter ended June 29, 2012. Interest income decreased $0.2 million to $0.1 million during the two quarters ended July 5, 2013 from $0.3 million during the two quarters ended June 29, 2012. The decrease was due primarily to reductions of our cash balances.

 

Interest Expense and Fees

 

Interest expense and fees decreased $1.3 million to $0.5 million during the quarter ended July 5, 2013 from $1.8 million during the quarter ended June 29, 2012. Interest expense and fees decreased to $1.2 million during the two quarters ended July 5, 2013 from $3.8 million during the two quarters ended June 29, 2012. The decrease was primarily due to the reduction of the principal balance of our revolving credit facility in the fourth quarter of 2012.

 

Gain (Loss) on Investments, net

 

We have a liability for a non-qualified deferred compensation plan. We maintain a portfolio of approximately $10.8 million in mutual fund investments and corporate owned life insurance under the plan. Changes in the fair value of the plan asset(s) are recorded as a gain or loss on deferred compensation investments and changes in the fair value of the liability are recorded as a component of compensation expense. In general, the compensation expense or benefit is substantially offset by the gains and losses on the investment. During the quarter ended July 5, 2013, we recorded a loss of $0.1 million on deferred compensation investments and a minimal decrease in compensation expense. During the two quarters ended July 5, 2013, we recorded a gain of $0.3 million on deferred compensation investments and an increase in compensation expense of $0.5 million.

 

During the quarter and two quarters ended July 5, 2013, we recorded a gain of $0.6 million on the recovery of previously recognized losses on auction rate securities.

 

Income Tax Expense (Benefit)

 

Our income tax expense was $6.4 million for the quarter ended July 5, 2013 compared to an income tax expense of $3.1 million for the quarter ended June 29, 2012. For the quarter ended July 5, 2013, we included a discrete tax expense of $1.5 million related to tax deficiencies in share-based compensation. The quarter ended June 29, 2012, included an $11.7 million discrete tax charge related to the election of Revenue Procedure 99-32 for tax years 2005-2007, based on our settlement with the Internal Revenue Service (“IRS”) in our second quarter of 2012. Excluding these items, the effective tax rate was 62.9% for the quarter ended July 5, 2013 compared to 75.0% for the quarter ended June 29, 2012. The effective tax rate differs from the 35% statutory corporate tax rate primary due to losses in foreign jurisdictions with lower statutory tax rates and  permanent non-deductible items, such as stock based compensation associated with our cost sharing arrangement.

 

Our income tax benefit was $16.5 million for the two quarters ended July 5, 2013 compared to an income tax expense of $3.1 million for the two quarters ended June 29, 2012. The two quarters ended July 5, 2013 includes a discrete tax benefit of $5.7 million relating to the 2012 federal R&D tax credit which was retroactively reinstated on January 2, 2013 with the enactment of the American Taxpayer Relief ACT of 2012 as well as the discrete tax charge of $2.1 million related to tax deficiencies in share based compensation. The two quarters ended June 29, 2012 included an $11.7 million discrete tax charge related to the election of Revenue Procedure 99-32 for tax years 2005-2007.  Excluding these items, the effective tax rate was 104.6% for the two quarters ended July 5, 2013, compared to 66.0% for the two quarters ended June 29, 2012.  The increase was due to the impact of income and losses in foreign jurisdictions being taxed at rates different than the United States Federal statutory rate, as described below.

 

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During the quarter ended June 29, 2012, we reached a settlement with the IRS in connection with the 2005 – 2007 examination periods. The settlement primarily related to transfer pricing adjustments on the outbound pricing of tangible goods and the valuation of intangible property sold to our controlled foreign corporation (“CFC”). The settlement resulted in a $57.6 million reduction in unrecognized tax benefits (“UTBs”), which was a component of income taxes payable, comprised of a cash payment of $46.6 million to the IRS and an $11.0 million decrease in deferred tax assets related federal R&D tax credits. The $46.6 million cash payment consisted of $34.2 million of additional tax due, $11.8 million of interest and $0.6 million of penalties. We further reduced the UTB balance with a $6.0 million payment to the state authorities related to the IRS examination settlement. The sum of these items reduced our UTBs by $63.6 million. In connection with the transfer pricing adjustments for the 2005 – 2007 exam periods, we made an election under Section 4 of Revenue Procedure 99-32, 199-2 C.B. 296. This election allowed us to repatriate cash to the U.S. group to the extent of the transfer pricing adjustments agreed to in the settlement, through the establishment of a deemed account receivable from the CFCs. As mentioned above, we recorded an $11.7 million discrete tax charge to income tax expense and increased income taxes payable, of which $7.4 million was a component of our UTBs, for interest based on the election. We repatriated $162.3 million of cash during 2012 related to the settlement.

 

As a global company, our effective tax rate is highly dependent upon the geographic composition of worldwide earnings and tax regulations. We are subject to income taxes in the United States and many foreign jurisdictions and significant judgment is required to determine worldwide tax liabilities. Our effective tax rate, as well as our actual taxes payable, could be adversely affected by changes in the mix of earnings between countries with differing tax rates. Our primary foreign operations are in Malaysia where we currently have a tax holiday resulting in a tax rate of 0%. This tax holiday began on July 1, 2009 and terminates on July 1, 2019. In order to retain this holiday in Malaysia, we must meet certain operating conditions, including compliance with warehouse and shipping quotas and specified manufacturing activities in Malaysia.  Absent such tax incentives, the corporate income tax rate in Malaysia that would otherwise apply to us would be 25%. If we cannot or elect not to comply with these conditions, we could lose the related tax benefits. In such event, we may be required to modify our operational structure and tax strategy. Any such modified structure or strategy may not be as beneficial as the benefits provided under the present tax concession arrangement.

 

The impact of income earned in foreign jurisdictions being taxed at rates different than the United States federal statutory rate was an expense of $4.0 million and a related effective tax rate impact of approximately 54.2% for the quarter ended July 5, 2013 compared to an expense of $0.6 million and a related effective tax rate benefit of approximately 5.3% for the quarter ended June 29, 2012.

 

The impact of income earned in foreign jurisdictions being taxed at rates different than the United States federal statutory rate was a benefit of $7.0 million and a related effective tax rate impact of approximately 54.2% for the two quarters ended July 5, 2013 compared to an expense of $0.8 million and a related effective tax rate benefit of approximately 5.3% for the two quarters ended June 29, 2012.

 

In determining net income (loss), we estimate and exercise judgment in the determination of tax benefit or expense and tax liabilities and in assessing the recoverability of deferred tax assets that arise from temporary differences between the tax and financial statement recognition of assets and liabilities.

 

In the ordinary course of business, the ultimate tax outcome of many transactions and calculations is uncertain, as the calculation of tax liabilities involves the application of complex tax laws in the United States and other jurisdictions. We recognize liabilities for additional taxes that may be due on tax audit issues based on an estimate of the ultimate resolution of those issues. Although we believe the estimates are reasonable, the final outcome may be different than amounts we estimate. Such determinations could have a material impact on the income tax provision, effective tax rate and operating results in the period they occur. In addition, the effective tax rate reflected in our forward-looking statements is based on current enacted tax law. Significant changes in enacted tax law could materially affect our estimates.

 

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Business Outlook

 

In our second quarter 2013 earnings release, furnished as an exhibit to the Form 8-K we filed with the Securities and Exchange Commission (“SEC”) on July 30, 2013, we announced anticipated revenue for the third quarter of 2013 to be in the range of $146.0 million to $152.0 million. Based on this outlook, we stated that we expect third quarter 2013 loss per diluted share to be approximately $(0.03) to $(0.01) per share. 

 

Contractual Obligations and Off-Balance Sheet Arrangements

 

Our contractual obligations and off-balance sheet arrangements have not changed materially from December 28, 2012. As of July 5, 2013, we had $18.5 million of open purchase orders for inventory from suppliers.

 

Liquidity and Capital Resources

 

Our capital requirements depend on a variety of factors, including but not limited to, the rate of increase or decrease in our existing business base; the success, timing and amount of investment required to bring new products to market; revenue growth or decline; dividend payments, and potential stock buybacks. As of July 5, 2013, our total shareholders’ equity was $978.0 million and we had $158.9 million in cash and cash equivalents. We had $2.8 million in short-term investments, consisting of bank time deposits, as of July 5, 2013. 

 

As of July 5, 2013, approximately $106.4 million of our cash and cash equivalents was held by our foreign subsidiaries. We have provided for federal and state taxation at 37.5% in anticipation of the Revenue Procedure 99-32 election related to the 2008-2009 IRS examination periods which allows for the repatriation of approximately $125.0 million.  Therefore, all of the $106.4 million of our cash and cash equivalents held by our foreign subsidiaries as July 5, 2013 would not be subject to further taxation upon repatriation.

 

As of July 5, 2013, we have $325.0 million of borrowing capacity under our five-year revolving credit facility (the “Facility”). The Facility matures on September 1, 2016 and is payable in full upon maturity. Under the Facility, $25.0 million is available for the issuance of standby letters of credit, $10.0 million is available as swing line loans and $50.0 million is available for multicurrency borrowings. Amounts repaid under the Facility may be re-borrowed. The Facility currently bears interest at 2.5% over one-month London Interbank Offered Rate (“LIBOR”) but is variable based on our leverage ratio as described in the credit agreement governing the Facility. As of July 5, 2013, we were in compliance with all applicable covenants of the above mentioned credit agreement.

 

We believe we have the financial resources necessary to meet business requirements for the next 12 months domestically and in our foreign operations, including our dividend program, the requisite capital expenditures for the maintenance of worldwide manufacturing capacity, working capital requirements, strategic investments or a stock buyback program.

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Our primary sources and uses of cash during the quarters ended July 5, 2013 and June 29, 2012 were as follows (in millions):

 

 

For the two quarters ended July 5, 2013, our cash flows from operations were $40.9 million compared to cash flows used of $10.2 million in the two quarters ended June 29, 2012. During the two quarters ended June 29, 2012, we made tax payments of $46.6 million to the IRS for tax years 2005-2007, which reduced our cash flow from operations. In addition, we had net income of $3.5 million in the two quarters ended July 5, 2013 compared to a net loss of $17.8 million in the same period last year. We received $1.0 million primarily from sales under the employee stock purchase plan. We used approximately $12.3 million for capital expenditures and $31.2 million to pay shareholder dividends. The resulting increase in cash was $0.1 million overall for the two quarters ended July 5, 2013. 

 

Non-cash Working Capital

 

Trade accounts receivable, less valuation allowances, decreased by $5.3 million or 9.7% to $49.4 million as of July 5, 2013 from $54.7 million as of December 28, 2012. This decrease was primarily a result of improved linearity of revenue.

 

Our net inventories decreased by $0.5 million or 0.7% to $74.4 million as of July 5, 2013 from $74.9 million as of December 28, 2012. 

 

Capital Expenditures

 

Capital expenditures, net of sale proceeds, were $12.3 million for the two quarters ended July 5, 2013 and $4.6 million for the two quarters ended June 29, 2012. Capital expenditures have been focused primarily on planned expansion of our Palm Bay, Florida facility and increases to test capacity for new products. We expect third quarter capital expenditures to be approximately $5.0 million to $8.0 million as we upgrade our internal production capability to achieve lower internal production costs. 

 

Cash Flow from Stock Plans

 

Cash flows from stock plans (including exercises of stock options (“Options”), tax payments on vesting restricted and deferred stock awards (“Awards”) and under our employee stock purchase plan) were $1.0 million in the two quarters ended July 5, 2013 compared to $1.0 million received in the two quarters ended June 29, 2012. 

 

We have changed the mix of new share-based incentive grants to a larger proportion of Awards than Options. Awards do not yield cash proceeds from an exercise event as do Options, but may result in tax payments on shares withheld. Additionally, Option exercises are decisions of grantees and are influenced by the level of our stock price and by other considerations of grantees.

 

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The recent decline in stock price has resulted in many of our Options being “underwater” with exercise prices in excess of the current stock price. While the level of cash inflow from stock plans is difficult to forecast or control, we believe it will remain a secondary source of cash.

 

Dividends on Common Stock and Repurchase of Common Stock

 

On April 24, 2013, our Board of Directors declared a dividend of $0.12 per share of common stock resulting in paid dividends of $15.9 million on May 24, 2013, to shareholders of record as of the close of business on May 14, 2013. On July 29, 2013, our Board of Directors declared a dividend of $0.12 per share of common stock to be paid on August 30, 2013, to shareholders of record as of the close of business on August 20, 2013.

 

Our Board of Directors previously authorized the repurchase of up to $50.0 million of our common stock through August 6, 2013. During the year ended December 28, 2012, we purchased and retired 1.9 million shares under the program at an average price per share of $8.03. We did not repurchase any of our common stock in the two quarters ended July 5, 2013. The plan expired on August 6, 2013 and no further shares may be purchased under the plan.

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Item 3.         Quantitative and Qualitative Disclosures about Market Risk.

 

Global economic conditions pose a risk to the overall economy as consumers and businesses may defer purchases in response to the uncertainty around tighter credit and negative financial news. These conditions could reduce product demand and affect other related matters. Demand could be different from our expectations due to many factors including changes in business and economic conditions, conditions in the credit market that could affect consumer confidence, customer acceptance of our products, changes in customer order patterns including order cancellations and changes in the level of inventory held by vendors.

 

Credit markets have tightened as a result of the recent financial crises, resulting in lower liquidity in many financial markets and excess volatility in fixed income, credit and equity markets. We have experienced a number of resulting effects, including product delays due to effects experienced by key suppliers; reduced orders and payments as customers are affected by tighter credit markets and/or insolvency; decreased investing and financing options in a tighter market; increased expenses; increased impairments resulting from lower orders and sales as customers experience difficulties obtaining financing; and volatility and extreme changes in the earnings and fair value of our investments.

 

Moreover, in the normal course of doing business, we are exposed to the risks associated with foreign currency exchange rates and changes in interest rates. We employ established policies and procedures governing the use of financial instruments, entered into for purposes other than trading purposes, to manage our exposure to these risks.

 

Our cash equivalents and investments are subject to three market risks: interest rate risk, credit risk and liquidity risk. Our investments are primarily held in money market funds and bank time deposits.

 

For further discussion of the risk related to foreign currency exchange rates and market risk, see our 2012 Annual Report on Form 10-K filed with the SEC on February 22, 2013.

 

Item 4.         Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of July 5, 2013. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our officers concluded that, as of July 5, 2013, our disclosure controls and procedures were (1) designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to our CEO and CFO by others within those entities, particularly during the period in which this report was being prepared and (2) effective to ensure that all material information required to be disclosed by Intersil in the reports that it files or furnishes under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that all such material information is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosures.

(b) Changes in Internal Controls. No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended July 5, 2013, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II-OTHER INFORMATION

 

Item 1.         Legal Proceedings.

 

In the litigation brought by Texas Advance Optical Solutions, Inc. (‘TAOS’), the judge issued a claim construction order in June 2013.  Subsequently, there will be further discovery and pre-trial motion practice. A trial has been tentatively scheduled for April 2014.

 

A portion of our activities are subject to export control regulations by the U.S. Department of State (DOS) under the U.S. Arms Export Control Act (AECA) and International Traffic in Arms Regulations (ITAR 22 CFR 120-130). In September 2010, in response to a request for information, we disclosed to the Directorate of Defense Trade Controls (DDTC) information concerning export activities for the time frame 2005 through 2010. The DOS administers the DDTC authority under ITAR 22 CFR 120-130 to impose civil penalties and other administrative sanctions for violations, including debarment from engaging in the exporting of defense articles. In June of 2013, DDTC notified us of potential violations of the ITAR and that it is considering pursuing administrative proceedings under Part 128 of the ITAR. Discussions with DDTC regarding this matter are ongoing.  We cannot predict the precise timing or probable outcome of any regulatory consequences related to the potential ITAR violations. Moreover, due our inability to predict the probable outcome of any administrative proceedings, we cannot make a reasonable estimate of the potential loss or range of losses at this time.

 

Please reference our 2012 Annual Report on Form 10-K filed with the SEC on February 22, 2013, for a discussion of the material legal proceedings to which we are a party.

 

Item 1A.Risk Factors.

 

In addition to the cautionary information included in this report, you should carefully consider the factors discussed in “Item 1A. Risk Factors” in our 2012 Annual Report on Form 10-K, filed with the SEC on February 22, 2013, which could materially adversely affect our business, financial condition and/or results of operations.

 

Item 2.         Unregistered Sales of Equity Securities and Use of Proceeds.

 

 

We did not purchase any shares under our stock repurchase program. A description of the maximum dollar value of common stock that may be purchased under our stock repurchase program is set forth in Note 8 to our unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q.  

 

Item 3.         Defaults Upon Senior Securities.

 

None.

 

Item 4.         Mine Safety Disclosures.

 

Not applicable.

 

Item 5.         Other Information.

 

None.

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Item 6.         Exhibits.

 

 

*  Filed or furnished herewith.

 

Attached as Exhibit 101 to this report are the following, formatted in XBRL (Extensible Business Reporting Language): (i) Unaudited Condensed Consolidated Statements of Operations, (ii) Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss), (iii) Unaudited Condensed Consolidated Balance Sheets, (iv) Unaudited Condensed Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements.

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SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: August 9, 2013

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