| Significant Accounting Policies | NOTE 2—SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents— Cash equivalents consist of highly liquid investments with original maturities of three months or less at the time of purchase. Investments with original maturities over three months are classified as short-term investments. We determine the appropriate classification of our cash and cash equivalents at the time of purchase.
Non-Marketable Equity Securities— Non-marketable equity securities are accounted for at historical cost or, if we have significant influence over the investee, using the equity method of accounting. These investments are evaluated for impairment quarterly. Such analysis requires significant judgment to identify events or circumstances that would likely have a significant, other than temporary, adverse effect on the carrying value of the investment.
Deferred Compensation Plan Assets— We have made available a non-qualified deferred compensation plan for certain eligible employees. Participants can direct the investment of their deferred compensation plan accounts from a portfolio of funds from which earnings are measured. Although participants direct the investment of these funds, they are classified as trading securities and are included in other non-current assets because they remain our assets until they are actually paid out to the participants. We maintain a portfolio of $ 9.9 million in mutual fund investments and corporate-owned life insurance under the plan. Changes in the fair value of the asset are recorded as a gain (loss) on investments and changes in the fair value of the liability are recorded as a component of compensation expense. In general, the compensation expense (benefit) is substantially offset by the gains and losses on the investment. During 2015, 2014, and 2013, we recorded gains on deferred compensation investments of $0.3 million, $0.5 million, and $1.5 million, respectively and compensation expense of $0.1 million, $0.7 million, and $1.7 million, respectively.
Fair Value Measurements— In order to determine the fair value of our assets and liabilities, we utilize three levels of inputs, focusing on the most observable inputs when available. Observable inputs are generally developed based on market data obtained from independent sources, whereas unobservable inputs reflect our assumptions about what market participants would use to value the asset or liability, based on the best information available in the circumstances. The three levels of inputs are as follows:
Level 1— Quoted prices in active markets which are unadjusted and accessible as of the measurement date for identical, unrestricted assets or liabilities;
Level 2— Quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly;
Level 3— Prices or valuations that require inputs that are unobservable and significant to the overall fair value measurement.
If we use more than one level of input that significantly affects fair value, we include the fair value under the lowest input level used.
Trade Receivables, net— Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Accounts receivable are reduced by an allowance for doubtful accounts, which reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on the aging of our accounts receivable, historical experience, known troubled accounts, management judgment and other currently available evidence. When items are deemed uncollectible, we charge them against the allowance for collection losses. We provide for estimated collection losses in the current period, as a component of revenue. We utilize credit limits, ongoing evaluation and trade receivable monitoring procedures to reduce the risk of credit loss. Credit is extended based on an evaluation of our customer’s financial condition and collateral is generally not required. Accounts receivable are also recorded net of sales returns and distributor allowances. These amounts are recorded when it is both probable and estimable that discounts will be granted or products will be returned. Please see “Revenue Recognition” for further details.
Inventories— Inventories are carried at the lower of standard cost (which approximates actual cost, determined by the first-in-first-out method) or market value. The carrying value of our inventories is reduced for any difference between cost and estimated market value of inventory that is determined to be obsolete or unmarketable, based upon assumptions about future demand and market conditions. Inventory adjustments establish a new cost basis and are considered permanent even if circumstances later suggest that increased carrying amounts are recoverable. If demand is higher than expected, we may sell inventory that had previously been written down.
Property, Plant and Equipment —Buildings, machinery and equipment are carried at cost, less accumulated depreciation and impairment charges, if any. We expense repairs and maintenance costs that do not extend an asset’s useful life or increase an asset’s capacity. Depreciation is computed using the straight-line method over the estimated useful life of the asset. The estimated useful lives of buildings, which include leasehold improvements, range between 10 and 30 years, or over the lease period, whichever is shorter. The estimated useful lives of machinery and equipment range between three and eight years. We lease certain facilities under operating leases and record the effective rental expense in the appropriate period on the straight-line method.
Accounting for Business Combinations — We use the acquisition method of accounting for business combinations and recognize assets acquired and liabilities assumed at their fair values on the date of the acquisition. While we use our best estimates and assumptions to value assets acquired and liabilities assumed, including contingent considerations, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may adjust the values of assets acquired and liabilities assumed with a corresponding offset to goodwill. Upon the conclusion of the measurement period, or final determination of the values of the assets acquired and liabilities assumed, any subsequent adjustments to values of such assets and liabilities are recognized in our consolidated statements of operations.
Asset Impairment— We recognize impairment losses on long-lived assets when indications of impairment exist and our estimate of undiscounted cash flows generated by those assets is less than the assets’ carrying amounts. The impairment loss is measured by comparing the fair value of the asset to its carrying amount. Fair value is estimated based on discounted future cash flows or market value, if available. Assets that qualify as held for sale are stated at the lower of the assets’ carrying amount or fair value and depreciation is no longer recognized.
Goodwill— Goodwill is an indefinite-lived intangible asset that is not amortized, but instead is tested for impairment annually or more frequently if indications of impairment exist. We perform an annual assessment of goodwill in the fourth quarter of each year, or more frequently if indications of potential impairment exist. We consider various qualitative factors, including macroeconomic and industry conditions, financial performance of the company and changes in the stock price of the company to determine whether it is necessary to perform a quantitative test for goodwill impairment. If we believe, as a result of our qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Under the quantitative test, goodwill is tested under a two-step method for impairment at a level of reporting referred to as a reporting unit. Step one of the quantitative analysis involves identifying potential impairment by comparing the fair value of each reporting unit with its carrying amount and, if applicable, step two involves estimation of the impairment loss, which is the amount of excess of carrying amount of goodwill over the implied fair value of the reporting unit goodwill. In 2015 and 2013, we performed a quantitative two-step assessment and concluded that the carrying value of goodwill had not been impaired as of the date of the assessment. In 2014, based on a qualitative assessment, we concluded that a quantitative two-step assessment was not required to be performed.
Purchased Intangibles — Purchased intangible assets with finite lives are carried at cost less accumulated amortization. Amortization is computed on a straight-line basis over the asset’s estimated useful life. Purchased intangibles include intangible assets subject to amortization, which are our developed technologies, backlog, customer relationships and intellectual property. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We measure recoverability of long-lived assets by comparing the carrying amount of the asset group to the future undiscounted net cash flows expected to be generated by those assets. If such assets are considered to be impaired, we recognize an impairment charge for the amount by which the carrying amounts of the assets exceeds the fair value of the assets.
Income Taxes —We follow the liability method of accounting for income taxes. Current income taxes payable and receivable and deferred income taxes resulting from temporary differences between the financial statements and the tax basis of assets and liabilities are separately classified on the consolidated balance sheets.
Uncertain tax positions and unrecognized tax benefits, or UTBs —We record our tax expense based on various probabilities of sustaining certain tax positions, using a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We record UTBs as a component of non-current income taxes payable, unless payment is expected within one year.
Applicable guidance requires us to record tax expense based on various estimates of probabilities of sustaining certain tax positions. As a result of this and other factors, our estimate of tax expense could change.
We classify accrued interest and penalties on income tax matters in the liabilities section of the balance sheet as non-current income taxes payable. When the interest and penalty portions of such uncertain tax positions are adjusted, it is classified as income tax expense. All of the uncertain tax positions and UTBs as of January 1, 2016 would impact our effective tax rate should they be recognized.
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 U.S., Malaysia 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 expense (benefit), effective tax rate and operating results in the period they occur. Significant changes in enacted tax law could materially impact our estimates.
Restructuring — We record restructuring charges when severance obligations are probable and reasonably estimable and the vested right attributable to the employees’ service is already rendered. We recognize a liability for costs associated with exit or disposal activities including costs associated with leases, when a liability is incurred rather than when an exit or disposal plan is approved. We continually evaluate the adequacy of the remaining liabilities under our restructuring initiatives. Although we believe that these estimates accurately reflect the costs of our restructuring plans, actual results may differ, thereby requiring us to record additional provisions or reverse a portion of such provisions.
Revenue Recognition — We recognize revenue related to sales of our products, net of sales returns and allowances, provided that (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred and title and risk of loss have transferred, (iii) the price is fixed or determinable and (iv) collectability is reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer. We consider the price to be fixed or determinable when the price is not subject to refund or adjustments or when such adjustments can be estimated. We evaluate the creditworthiness of our customers to determine that appropriate credit limits are established prior to the acceptance of an order.
We initially invoice certain distributors at list price upon shipment and issue a credit for pricing adjustments (referred to as “ship and debit claims”), once product has been sold to the end customer and the distributor has met certain reporting requirements. We estimate and record a reserve for the ship and debit claims based on our assessment of contractual terms with the respective distributors, historical information and prevailing economic situation at the time recognition of revenue.
For certain distributors, we defer recognition until the distributors resell the products to their end customer (“sell-through distributor”). Revenue at published list price and cost of revenue to sell-through distributors are deferred until either the product is resold by the distributor or, in certain cases, return privileges terminate, at which time revenue and cost of revenue are recorded in the consolidated statement of income. The final price is also subject to ship and debit credits, reducing the final amount recorded in revenue at resale.
Revenue from sales of our products that are subject to inventory consignment agreements, including consignment arrangements with distributors, is recognized in accordance with the principles discussed above, but delivery occurs when the customer or distributor pulls product from consignment inventory that we store at designated locations.
The following table summarizes the deferred income balance, primarily consisting of sell-through distributors (in thousands):
As of January 1, 2016
As of January 2, 2015
Deferred revenue
$ 17,626
$ 14,546
Deferred cost of revenue
(3,144)
(2,915)
Deferred income
$ 14,482
$ 11,631
Warranty— We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our suppliers, the estimated warranty obligation is affected by ongoing product failure rates and material usage costs incurred in correcting a product failure. Actual product failure rates or material usage costs that differ from estimates result in revisions to the estimated warranty liability. We warrant for a limited period of time that our products will be free from defects in material workmanship and possess the electrical characteristics to which we have committed. We estimate warranty allowances based on historical warranty experience. Historically, warranty expenses were not material to our consolidated financial statements.
Research and Development —Research and development costs consist of the cost of designing, developing and testing new or significantly enhanced products and are expensed as incurred.
Advertising Expense —Advertising costs are expensed in the period incurred. Advertising expense was $4.5 million, $ 4.2 million, and $3.4 million in 2015, 2014, and 2013, respectively.
Equity-based Compensation —Our equity-based compensation plans allow several forms of equity compensation including stock options, or Options, restricted and deferred stock awards, or Awards, and employee stock purchase plans, or ESPPs. The 2008 Equity Compensation Plan, or the 2008 Plan, includes several available forms of stock compensation of which only Options and Awards have been granted to date. Awards issued consist of deferred stock units and restricted stock units, which may differ in regard to the timing of the related prospective taxable event to the recipient.
Additionally, we have an ESPP Plan, whereby eligible employees can purchase shares of Intersil’s common stock through payroll deductions at a price not less than 85% of the market value of the stock on specified dates, with no look-back provision.
Our plans allow employees an option to have Awards withheld as a means of meeting minimum statutory tax withholding requirements. For the majority of Awards granted, the number of shares issued on the date the Awards vest is net of the minimum statutory withholding requirements that we pay in cash to the appropriate taxing authorities on behalf of our employees. In our consolidated financial statements, we treat shares withheld for tax purposes on behalf of our employees in connection with the vesting of Awards as common stock repurchases because they reduce the number of shares that would have been issued upon vesting. Withheld shares are cancelled immediately and are not considered outstanding.
Equity-based compensation cost is measured at the grant date, based on the fair value of the options and awards ultimately expected to vest, and is recognized as an expense, on a straight-line basis, over the requisite service period. We use a lattice method of valuation for estimating the grant date fair value of options and awards that include market-based vesting conditions. Calculating fair value requires us to estimate certain key assumptions in the valuation model, including expected stock price volatility, the risk-free interest rate in the market, the expected life of the award and the annualized dividend yield. Volatility is one of the most significant determinants of fair value. We estimate our volatility using the actual historical volatility of our stock price. In case of options and awards that include market-based vesting conditions, our estimate for volatility includes actual historical volatility of stock prices of certain peer companies. We estimate our expected risk-free interest rate by using the zero-coupon U.S. Treasury rate at the time of the grant related to the expected life of the grant. We estimate forfeitures based on historical information about turnover for each appropriate employee level. We estimate the annualized dividend yield by dividing the current annualized dividend by the closing stock price on the date of grant. Expected forfeitures are estimated and offset the compensation costs recorded in the financial statements.
Most options vest 25% in the first year and quarterly thereafter for three or four years and generally have seven year contract lives. For Awards, the expected life for amortization of the grant date fair value is the vesting term, gener ally three years in the case of deferred stock units and four years in the case of restricted stock units. We issue new shares of common stock upon the exercise of Options.
Loss Contingencies —We estimate and accrue loss contingencies at the point that the losses become probable. For litigation, we include an estimate of legal costs for defense as part of the reserve for loss contingencies.
Retirement Benefits —We sponsor a 401(k) savings and investment plan that allows eligible U.S. employees to participate in making pre-tax contributions to the 401(k) plan. We match the employee contributions on a dollar-for-dollar basis up to a certain predetermined percentage. Employees fully vest in the matching contributions after five years of service. We made matching contributions of $4.8 million, $4.5 million, and $5.4 million during 2015, 2014, and 2013, respectively.
We have voluntary defined contribution plans in various non-U.S. locations. Further, we maintain a limited number of defined benefit plans for certain non-U.S. locations. Total costs under these plans were $0.9 million, $0.8 million, and $3.6 million during 2015, 2014, and 2013, respectively. Accrued liabilities relating to these unfunded plans were $7.8 million and $6.8 million as of January 1, 2016 and January 2, 2015, respectively.
Foreign Currency Translation— For subsidiaries in which the functional currency is the local currency, gains and losses resulting from translation of foreign currency financial statements into U.S. dollars are recorded as a component of accumulated other comprehensive income, or OCI. Cumulative translation adjustments in accumulated OCI were $ 0.3 million, $0.9 million, and $2.7 million as of January 1, 2016, January 2, 2015, and January 3, 2014, respectively.
Segment Information— We report our results in one reportable segment. We design and develop innovative power management and precision analog integrated circuits, or ICs. Our chief executive officer is our chief operating decision maker.
Use of Estimates— The financial statements have been prepared in conformity with accounting principles generally accepted in the U.S. and require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Recently Adopted Accounting Guidance
In November 2015, FASB issued guidance intended to simplify accounting for deferred taxes. Existing GAAP guidance requires us to record deferred tax balances as either current or non-current in accordance with the classification of the underlying attributes. We elected to early adopt this guidance using the prospective method. Please see discussion under Note 9 for the discussion related to impact of the early adoption of this guidance.
In January 2015, FASB issued guidance on simplifying income statement presentation by eliminating the concept of extraordinary items from U.S. GAAP. The amendments in this update are effective for us from November 1, 2016, and in interim periods during that year. A reporting entity may apply the amendments prospectively and retrospectively to all periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the year of adoption. We have evaluated the accounting guidance and determined that there is no impact of this update to our consolidated financial statements.
In March 2013, FASB issued an accounting standard update requiring an entity to release into net income the entire amount of a cumulative translation adjustment related to its investment in a foreign entity when, as a parent, it sells either a part or all of its investment in the foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets within the foreign entity. This accounting standard update was effective for us beginning in the first quarter of 2015. Upon adoption, the application of this accounting standard update did not have a material impact to our consolidated financial statements.
Recent Accounting Guidance Not Yet Adopted
In September 2015, FASB issued guidance intended to simplify accounting for adjustments to provisional amounts recorded in connection with business combinations. The guidance will be effective for us beginning in 2016. Early adoption is permitted. We do not expect this guidance to have a material impact to our consolidated financial statements.
In July 2015, FASB issued guidance to simplify the accounting for inventory and to more closely align their guidance with international accounting standards. The amendments in this update apply to companies which use inventory valuation methods other than last-in, first-out and the retail inventory method to change the way that they subsequently measure the value of inventory on their balance sheet. Under the new guidance, inventory should be valued at the lower of cost and net realizable value rather than the lower of cost and market. The guidance is effective for us beginning in 2016. We do not expect this amended guidance to have an impact to our consolidated financial statements, as the new guidance aligns with our current practice of using net realizable value as our estimate of market value.
In February 2015, FASB issued an amendment to the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. All legal entities are subject to reevaluation under the revised consolidation model. The guidance is effective for us beginning in 2016. We do not expect that the adoption of this guidance will have an impact to our consolidated financial statements.
In June 2014, FASB issued authoritative guidance that resolves the diverse accounting treatment for equity-based payment awards that require a specific performance target to be achieved in order for employees to become eligible to vest in the awards. The guidance applies to entities that grant their employees equity-based awards that include a performance target that could be achieved after the requisite service period. The guidance explicitly requires that a performance target of this nature be treated as a performance condition and should not be reflected in estimating the grant date fair value of the award. The guidance is effective for us beginning in 2016. We are currently evaluating the impact that this guidance will have on our financial condition and results of operations.
In May 2014, FASB issued authoritative guidance, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. In July 2015, FASB announced that implementation of this guidance will be delayed by one year. When issued, this guidance is expected to replace most existing revenue recognition guidance in U.S. GAAP. The new standard will be effective for us on December 31, 2018. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that this guidance will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting .
In April 2014, FASB issued authoritative guidance that raises the threshold for a disposal transaction to qualify as a discontinued operation and requires additional disclosures about discontinued operations and disposals of individually significant components that do not qualify as discontinued operations. This guidance will be effective prospectively for the first quarter of 2016, which will only affect any dispositions we may make after the effective date. |
