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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 April 2, 2010
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)
| Delaware | 59-3590018 | |
(State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) |
1001 Murphy Ranch Road
Milpitas, California 95035
(Address of principal executive offices, including zip code)
(408) 432-8888
(Registrant’s telephone number, including area code)
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. Yes x 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). Yes ¨ No ¨
Indicate by check mark if 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 Act).
| Large accelerated filer | x | Accelerated filer | ¨ | |||
| Non-accelerated filer | ¨ | Smaller Reporting Company | ¨ | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of the issuer’s classes of common stock as of the close of business on April 30, 2010:
Title of Each Class | Number of Shares | |
| Class A common stock par value $.01 per share | 123,695,151 |
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INDEX
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| Item 1. | Financial Statements |
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| Quarter Ended | ||||||||
| April 2, 2010 | April 3, 2009 | |||||||
($ in thousands, except share data) | ||||||||
Revenue | $ | 189,386 | $ | 118,171 | ||||
Cost of revenue | 82,460 | 53,023 | ||||||
Gross profit | 106,926 | 65,148 | ||||||
Operating costs and expenses | ||||||||
Research and development | 41,674 | 32,764 | ||||||
Selling, general and administrative | 32,554 | 25,822 | ||||||
Amortization of purchased intangibles | 2,881 | 3,506 | ||||||
In-process research and development | — | (215 | ) | |||||
Restructuring and other related (credits) charges | (10 | ) | 1,562 | |||||
Operating income | 29,827 | 1,709 | ||||||
Gain (loss) on deferred compensation investments, net | 340 | (242 | ) | |||||
Other-than-temporary impairment loss | (1,082 | ) | — | |||||
Interest income, net | 526 | 1,437 | ||||||
Income before income taxes | 29,611 | 2,904 | ||||||
Income tax expense | 1,936 | 526 | ||||||
Net income | $ | 27,675 | $ | 2,378 | ||||
Earnings per share: | ||||||||
Basic | $ | 0.22 | $ | 0.02 | ||||
Diluted | $ | 0.22 | $ | 0.02 | ||||
Cash dividends declared per common share | $ | 0.12 | $ | 0.12 | ||||
Weighted average common shares outstanding (in millions): | ||||||||
Basic | 123.0 | 121.7 | ||||||
Diluted | 123.4 | 121.9 | ||||||
See notes to unaudited condensed consolidated financial statements.
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UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
| April 2, 2010 | January 1, 2010 | |||||||
| ($ in thousands, except share data) | ||||||||
| ASSETS | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 379,140 | $ | 347,667 | ||||
Short-term investments | 498 | 13,498 | ||||||
Trade receivables, net of allowances ($6,393 as of April 2, 2010 and $8,463 as of January 1, 2010) | 85,221 | 73,633 | ||||||
Inventories | 80,334 | 81,236 | ||||||
Prepaid expenses and other current assets | 7,523 | 9,403 | ||||||
Deferred income tax asset | 27,379 | 27,379 | ||||||
Total Current Assets | 580,095 | 552,816 | ||||||
Non-current Assets | ||||||||
Property, plant and equipment, net of accumulated depreciation ($196,036 as of April 2, 2010 and $193,348 as of January 1, 2010) | 100,780 | 102,251 | ||||||
Purchased intangibles, net of accumulated amortization ($43,559 as of April 2, 2010 and $63,334 as of January 1, 2010) | 25,997 | 26,627 | ||||||
Goodwill | 316,894 | 314,676 | ||||||
Long-term investments | 62,352 | 63,937 | ||||||
Deferred income tax asset | 91,265 | 90,975 | ||||||
Other | 14,396 | 14,499 | ||||||
Total Non-current Assets | 611,684 | 612,965 | ||||||
Total Assets | $ | 1,191,779 | $ | 1,165,781 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current Liabilities | ||||||||
Trade payables | $ | 37,895 | $ | 31,496 | ||||
Accrued compensation | 33,818 | 34,433 | ||||||
Deferred net revenue | 11,529 | 9,687 | ||||||
Other accrued expenses | 18,480 | 24,273 | ||||||
Non-income taxes payable | 5,953 | 4,104 | ||||||
Income taxes payable | 29,974 | 30,702 | ||||||
Total Current Liabilities | 137,649 | 134,695 | ||||||
Shareholders’ Equity | ||||||||
Preferred Stock, $0.01 par value, 2 million shares authorized; no shares issued or outstanding | — | — | ||||||
Class A Common Stock, $.01 par value, voting; 600 million shares authorized; 123,506,810, shares issued and outstanding as of April 2, 2010 and 122,816,221 shares issued and outstanding as of January 1, 2010, respectively | 1,235 | 1,228 | ||||||
Additional paid-in capital | 1,759,992 | 1,764,046 | ||||||
Accumulated deficit | (698,022 | ) | (725,697 | ) | ||||
Accumulated other comprehensive loss | (9,075 | ) | (8,491 | ) | ||||
Total Shareholders’ Equity | 1,054,130 | 1,031,086 | ||||||
Total Liabilities and Shareholders’ Equity | $ | 1,191,779 | $ | 1,165,781 | ||||
See notes to unaudited condensed consolidated financial statements.
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| Quarter Ended | ||||||||
| April 2, 2010 | April 3, 2009 | |||||||
| ($ in thousands) | ||||||||
Operating activities: | ||||||||
Net income | $ | 27,675 | $ | 2,378 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 7,731 | 9,167 | ||||||
Gain on assets reclassified from held for sale status | (1,078 | ) | — | |||||
Provision for excess inventory obsolescence | 926 | 700 | ||||||
Stock-based compensation | 7,401 | 5,661 | ||||||
Tax effect of stock options and awards exercised | — | (753 | ) | |||||
Excess tax benefits received on exercise of stock-based awards | (55 | ) | (68 | ) | ||||
In-process research and development | — | (215 | ) | |||||
Loss (gain) on sale of equipment | 499 | (30 | ) | |||||
Other-than-temporary impairment losses | 1,082 | — | ||||||
Deferred income taxes | — | (9,464 | ) | |||||
Changes in operating assets and liabilities: | ||||||||
Trade receivables | (11,588 | ) | 6,186 | |||||
Inventories | (24 | ) | 9,139 | |||||
Prepaid expenses and other current assets | 440 | (265 | ) | |||||
Trade payables and accrued liabilities | 4,335 | (11,530 | ) | |||||
Income taxes | (726 | ) | 749 | |||||
Other, net | 130 | 2,244 | ||||||
Net cash provided by operating activities | 36,748 | 13,899 | ||||||
Investing activities: | ||||||||
Proceeds from sales or maturity of short-term investments | 13,000 | — | ||||||
Purchases of short-term investments | — | (13,624 | ) | |||||
Acquisitions, net of cash received | (4,000 | ) | (609 | ) | ||||
Proceeds from sale of property, plant and equipment | 52 | 30 | ||||||
Purchase of property, plant and equipment | (2,449 | ) | (2,549 | ) | ||||
Net cash provided by (used in) investing activities | 6,603 | (16,752 | ) | |||||
Financing activities: | ||||||||
Proceeds from exercise of stock-based awards | 3,314 | 1,587 | ||||||
Excess tax benefits received on exercise of stock-based awards | 55 | 68 | ||||||
Dividends paid | (14,779 | ) | (14,615 | ) | ||||
Net cash used in financing activities | (11,410 | ) | (12,960 | ) | ||||
Effect of exchange rates on cash and cash equivalents | (468 | ) | (2,193 | ) | ||||
Net increase (decrease) in cash and cash equivalents | 31,473 | (18,006 | ) | |||||
Cash and cash equivalents at the beginning of the period | 347,667 | 215,625 | ||||||
Cash and cash equivalents at the end of the period | $ | 379,140 | $ | 197,619 | ||||
See notes to unaudited condensed consolidated financial statements.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Basis of Presentation
Intersil Corporation (“Intersil”) is a global designer and manufacturer of high-performance analog and mixed-signal integrated circuits (ICs) for applications in the high-end consumer, industrial, communications and computing electronics markets.
In our opinion, these unaudited interim 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 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 January 1, 2010 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 January 1, 2010.
We utilize a 52/53 week fiscal year, ending on the nearest Friday to December 31. The next 53 week period will be in 2013. 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. For example, sales in the high-end consumer and computing markets have historically experienced weaker demand in the first and second fiscal quarters and stronger demand in the third and fourth quarters.
Certain amounts presented in prior periods have been reclassified to conform to current year presentation.
Note 2—Comprehensive Income
| Quarter Ended | ||||||||
| April 2, 2010 | April 3, 2009 | |||||||
(in thousands) | ||||||||
Net income | $ | 27,675 | $ | 2,378 | ||||
Currency translation adjustments | (372 | ) | (1,275 | ) | ||||
Unrealized (loss) gain on available-for-sale investments, net of tax of $290 as of April 2, 2010 and $(16) as of April 3, 2009 | (213 | ) | 215 | |||||
Comprehensive income | $ | 27,090 | $ | 1,318 | ||||
Currency translation adjustments (CTA) result when we translate our foreign currency based financial statements into US dollars. A weakening US dollar will produce comprehensive income. Conversely, a strengthening US dollar will produce comprehensive loss.
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INTERSIL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 3—Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share ($ and shares in thousands, except per share amounts):
| Quarter Ended | ||||||
| April 2, 2010 | April 3, 2009 | |||||
Numerator: | ||||||
Net income to common shareholders | $ | 27,675 | $ | 2,378 | ||
Denominator: | ||||||
Denominator for basic earnings per share-weighted average common shares | 123,022 | 121,692 | ||||
Effect of stock options and awards | 345 | 200 | ||||
Denominator for diluted earnings per share-adjusted weighted average common shares | 123,367 | 121,892 | ||||
Earnings per share | ||||||
Basic | $ | 0.22 | $ | 0.02 | ||
Diluted | $ | 0.22 | $ | 0.02 | ||
Anti-dilutive shares not included in the above calculations | ||||||
Awards | 1,165 | 2,607 | ||||
Options | 14,063 | 16,215 | ||||
Note 4—Stock-Based Compensation
We use equity-based compensation plans to enhance our ability to attract, retain and reward talented employees. Shares issued under these plans are made from newly-issued stock. The plans allow several forms of equity compensation including stock options, restricted and deferred stock awards and employee stock purchase plans.
Valuations, Assumptions and Terms
We use a binomial lattice model to estimate the fair value of stock options, which is amortized as compensation cost over the lesser of the grantee’s requisite service period or the vesting term of the stock option. The lattice model uses historical exercise patterns to predict the life of stock options and estimates the future volatility of the underlying stock price, considering historical and implied volatility in its calculations.
We used the following assumptions in the lattice model for stock options awarded in the periods indicated.
| Quarter ended | ||||
| April 2, 2010 | April 3, 2009 | |||
Range of expected volatilities | 42.4 - 45.2% | 46.5% - 51.1% | ||
Weighted average volatility | 42.9% | 47.3% | ||
Range of dividend yields | 3.1 -3.4% | 4.0 - 5.0% | ||
Weighted average dividend yield | 3.2% | 4.0% | ||
Range of risk-free interest rates | 2.2 - 2.7% | 3.1 - 4.1% | ||
Weighted average risk free interest rate | 2.5% | 3.9% | ||
Range of expected lives, in years | 5.4 - 5.6 | 4.9 -5.7 | ||
Weighted average expected life, in years | 5.4 | 5.5 | ||
Generally, our stock options vest 25% in the first year and quarterly thereafter over three or four years and have seven year contract lives.
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INTERSIL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Market value at the date of grant is used as the fair value of stock awards. We amortize awards as compensation cost over the lesser of the requisite service period or the vesting term, which is generally three years for deferred stock units and four years for restricted stock units.
The compensation cost for shares issued under the employee stock purchase plan is 15% of the share price, the amount of the discount the employee obtains at the date of the purchase transaction.
Equity-Based Compensation Summary
| Stock Options | Stock Awards | Aggregate Information | ||||||||||||||||
| Shares (in thousands) | Weighted average exercise price (per share) | Weighted average remaining contract lives (years) | Shares (in thousands) | Aggregate intrinsic value (in millions) | Aggregate unrecognized compensation cost (in millions) | |||||||||||||
Outstanding as of January 1, 2010 | 12,268 | $ | 19.18 | 3.7 | 2,528 | |||||||||||||
Granted (1) | 2,156 | 14.82 | 7.0 | 1,084 | ||||||||||||||
Performance adjustment | — | — | — | (47 | ) | |||||||||||||
Exercised (2) | (196 | ) | 9.95 | 0.3 | (488 | ) | ||||||||||||
Canceled | (165 | ) | 21.14 | 2.6 | (32 | ) | ||||||||||||
Outstanding as of April 2, 2010 | 14,063 | $ | 18.61 | 4.5 | 3,045 | $ | 58.0 | $ | 41.9 | |||||||||
Exercisable/vested as of April 2, 2010 (2) | 7,211 | $ | 22.61 | 2.8 | 108 | $ | 5.6 | — | ||||||||||
Unexercisable/unvested as of April 2, 2010 | 6,852 | $ | 14.41 | 6.4 | 2,937 | $ | 52.3 | $ | 41.9 | |||||||||
Number vested and expected (as of April 2, 2010) to ultimately vest | 13,846 | $ | 18.68 | 4.5 | 1,904 | $ | 41.0 | |||||||||||
| Stock Options | Stock Awards | Aggregate | ||||||||||||||||
Weighted average fair value per share of awards granted in the quarter ended April 2, 2010 | $ | 4.40 | $ | 17.38 | $ | 8.75 | ||||||||||||
Weighted average fair value per share of awards granted in the quarter ended April 3, 2009 | $ | 3.93 | $ | 11.99 | $ | 6.72 | ||||||||||||
| (1) | Stock awards granted in 2010 include 232,003 performance-based grants. See Performance-based Grants section below. |
| (2) | Exercisable awards have reached full vested status. |
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INTERSIL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Additional Disclosures | Quarter ended April 2, 2010 | Quarter ended April 3, 2009 | ||||
($ in millions, share data in thousands) | ||||||
Shares issued under the employee stock purchase plan | 246 | 272 | ||||
Aggregate intrinsic value of stock options exercised | $ | 0.9 | $ | 0.4 | ||
Impact on Financial Statements
| Quarter ended April 2, 2010 | Quarter ended April 3, 2009 | |||||
| (in thousands) | ||||||
By income statement line item | ||||||
Cost of revenue | $ | 560 | $ | 633 | ||
Research and development | 2,938 | 3,298 | ||||
Selling, general and administrative | 3,903 | 1,730 | ||||
By stock plan | ||||||
Stock options | $ | 2,459 | $ | 4,487 | ||
Restricted and deferred stock awards | 4,644 | 966 | ||||
Employee stock purchase plan | 298 | 208 | ||||
| April 2, 2010 | January 1, 2010 | |||||
| (in millions) | ||||||
Stock-based compensation capitalized in inventory | $ | 0.7 | $ | 0.9 | ||
Performance-based Grants
As of April 2, 2010, we had stock awards outstanding that include the usual service conditions as well as performance conditions relating to revenue and operating income relative to internal goals and performance by other companies in our industry. Under the terms of the agreements, participants may receive from 0 - 200% of the original grant.
| April 2, 2010 | ||
| (in thousands) | ||
Performance-based deferred stock units (PDSU) outstanding | 616 | |
Maximum PDSU shares that could be issued assuming the highest level of performance | 917 | |
PDSU shares expected to vest (1) | 574 |
| (1) | We periodically evaluate future performance expectations to estimate the number of shares that will ultimately vest. |
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INTERSIL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 5—Investments
Investments designated as available for sale (AFS) are reported at fair value. We record the unrealized gains and losses, net of tax, in stockholders’ equity as a component of other comprehensive income. We determine the cost of securities sold based on the specific identification method. Realized gains or losses and impairment losses, such as other-than-temporary losses on equity securities and the credit component of other-than-temporary losses on debt securities, are recorded in other-than-temporary impairment losses on the accompanying financial statements.
Investments designated as held to maturity (HTM) are reported at amortized cost. Securities are classified as HTM when we have the positive intent and ability to hold the investment until maturity. Gains and losses are not reported in the financial statements until realized or until a decline in value is deemed to be other-than-temporary.
On April 3, 2009, we adopted Financial Accounting Standards Board (FASB) guidance that requires an entity to recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the non-credit component in other comprehensive income (OCI) when the entity does not intend to sell the security and it is more likely than not that the entity will not be required to sell the security prior to recovery. This guidance also requires expanded disclosures about other-than-temporary impairments of debt and equity securities. These standards were effective for periods ending after June 15, 2009 and did not change the recognition of other-than-temporary impairment for equity securities.
In determining whether an other-than-temporary loss is due to credit loss, we consider many factors including, but not limited to, the adverse conditions related to a security, industry or geographic region, the failure of an issuer to make interest or principal payments, and rating changes of the security or issuer made by rating agencies. We did not recognize a non-credit component of an other-than-temporary impairment of a debt security in other comprehensive income in the quarter ended April 2, 2010.
We classify all investments maturing in one year or less as short-term and all investments maturing in more than one year as long-term.
| As of April 2, 2010 | ||||||||||||||
| Amortized cost | Gross unrealized gains | Gross unrealized losses | Fair value | Maturity range (in years) | ||||||||||
| (in millions) | ||||||||||||||
Short-term Investments | ||||||||||||||
U. S. Treasuries (HTM) | $ | 0.5 | $ | — | $ | — | $ | 0.5 | < 1 | |||||
Long-term Investments | ||||||||||||||
Debt securities | ||||||||||||||
Auction rate securities (AFS) | $ | 79.4 | $ | 0.7 | $ | 17.7 | $ | 62.4 | 12-41 | |||||
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INTERSIL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| As of January 1, 2010 | ||||||||||||||
| Amortized cost | Gross unrealized gains | Gross unrealized losses | Fair value | Maturity range (in years) | ||||||||||
| (in millions) | ||||||||||||||
Short-term Investments | ||||||||||||||
U.S. Treasuries (HTM) | $ | 0.5 | $ | — | $ | — | $ | 0.5 | < 1 | |||||
Bank time deposits (AFS) | 13.0 | — | — | 13.0 | < 1 | |||||||||
Total | $ | 13.5 | $ | — | $ | — | $ | 13.5 | ||||||
Long-term Investments | ||||||||||||||
Equity securities | ||||||||||||||
Preferred shares (AFS) | $ | 1.1 | $ | 0.6 | $ | — | $ | 1.7 | N/A | |||||
Debt securities | ||||||||||||||
Auction rate securities (AFS) | 79.4 | 0.6 | 17.8 | 62.2 | 12-41 | |||||||||
Total | $ | 80.5 | $ | 1.2 | $ | 17.8 | $ | 63.9 | ||||||
We classify auction rate securities (ARS) and preferred equity securities as available for sale and record them at fair value. During the quarter ended April 2, 2010, we determined that certain of the equity securities had declines in value that were other-than-temporary and we recorded a $1.1 million impairment charge on the securities. During the year ended January 1, 2010, we recorded a $14.3 million impairment charge on ARS securities. The impairment charges are included in other-than-temporary impairment losses in the accompanying financial statements. The amortized cost of these securities is reduced by the recognized losses.
The preferred shares listed in the table above represent auction rate securities that were converted to preferred shares at the option of the issuer during the year ended January 2, 2009.
The following table presents a rollforward of the amount related to credit losses on debt securities recognized in earnings during the quarter ended April 2, 2010 (in millions).
| AFS Debt Securities | |||
Beginning balance as of January 1, 2010 | $ | 35.3 | |
Credit losses recognized in earnings | — | ||
Ending balance as of April 2, 2010 | $ | 35.3 | |
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INTERSIL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes our securities with unrealized losses and the length of time these securities have been in a loss position as of April 2, 2010 and January 1, 2010 (in millions).
| Less than 12 months | Greater than 12 months | Total | |||||||||||||||||||
| Fair value | Gross unrealized losses | Fair value | Gross unrealized losses | Fair value | Gross unrealized losses | ||||||||||||||||
AFS securities as of April 2, 2010 | $ | 1.7 | $ | (0.1 | ) | $ | 51.0 | $ | (17.6 | ) | $ | 52.7 | $ | (17.7 | ) | ||||||
AFS securities as of January 1, 2010 | $ | 4.0 | $ | (0.1 | ) | $ | 51.0 | $ | (17.7 | ) | $ | 55.0 | $ | (17.8 | ) | ||||||
We have recorded a total net unrealized loss on investments of $17.0 million and a related deferred tax benefit of $5.9 million, for a net unrealized loss of $11.1 million in accumulated other comprehensive loss. We have concluded this decline in the fair value of these securities should not be recorded in earnings because:
| • | we do not intend to sell the securities; |
| • | we believe it is more likely than not that we will not be required to sell the securities prior to the recovery of amortized cost; and |
| • | the unrealized losses are due to conditions other than a credit loss. |
We may be required to record additional impairment charges if additional declines in value are determined to be other-than-temporary. The fair value of these securities has been estimated based on prices provided by third parties along with estimates made by us, which could change significantly based on market conditions.
Trading Investments
Trading investments consist exclusively of a portfolio of marketable mutual funds and corporate owned life insurance in a qualified deferred employee compensation plan. We have an offsetting liability recorded for the investments. The funds are recorded at fair value. We recognize changes in fair value currently in gain (loss) on deferred compensation investments and we record changes in the liability in selling, general and administrative expense. We classify these investments as other non-current assets since we have no plan or intent of liquidating or otherwise using these securities in our business operations.
| Quarter ended April 2, 2010 | Quarter ended April 3, 2009 | ||||||
| (in thousands) | |||||||
By income statement line item | |||||||
Gain (loss) on deferred compensation investments, net | $ | 340 | $ | (242 | ) | ||
Selling, general and administrative | $ | 326 | $ | 418 | |||
| April 2, 2010 | January 1, 2010 | ||||||
| (in millions) | |||||||
Deferred compensation assets (trading) | $ | 11.0 | $ | 11.1 | |||
Deferred compensation liability | $ | 11.1 | $ | 11.2 | |||
Note 6—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.
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INTERSIL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Level 1 – Quoted prices in active markets which are unadjusted and accessible at 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.
We determine fair value on the following assets using these input levels.
| Fair value as of April 2, 2010 using (in millions): | ||||||||||||
| Total | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||
Trading securities | $ | 11.0 | $ | 1.1 | $ | 9.9 | $ | — | ||||
Available for sale securities | 62.4 | — | — | 62.4 | ||||||||
Held to maturity securities | 0.5 | 0.5 | — | — | ||||||||
Foreign exchange contracts | 0.8 | — | 0.8 | — | ||||||||
| $ | 74.7 | $ | 1.6 | $ | 10.7 | $ | 62.4 | |||||
For actively traded securities, we generally rely upon the valuations as provided by the custodian of these assets. For available-for-sale securities, such as illiquid auction rate securities and preferred stock, we use the present value of expected cash flows to determine fair value. Significant judgments are required in the estimation of fair value, including assumptions about the expected holding period, yield and appropriate discount rates.
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.
The following is a reconciliation of changes in the fair market values determined using Level 3 significant unobservable inputs as of April 2, 2010.
| Level 3 | ||||
| (in millions) | ||||
Available for sale securities as of January 1, 2010 | $ | 63.9 | ||
Recognized losses | (1.1 | ) | ||
Unrealized losses | (0.4 | ) | ||
Available for sale securities as of April 2, 2010 | $ | 62.4 | ||
Recognized losses are included in other-than-temporary impairment loss in the statement of operations.
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INTERSIL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 7—Inventories
Inventories are summarized below:
| April 2, 2010 | January 1, 2010 | |||||
| (in millions) | ||||||
Finished products | $ | 23.4 | $ | 23.0 | ||
Work in progress | 52.9 | 54.1 | ||||
Raw materials and supplies | 4.0 | 4.1 | ||||
Total inventories | $ | 80.3 | $ | 81.2 | ||
Note 8—Acquisitions
On January 8, 2010, we acquired the business of Rock Semiconductor (“Rock”) for $4.5 million in cash. The purchase includes primarily intellectual property. Rock was a privately-held, fabless semiconductor company with technology leadership in highly integrated power management ICs.
On August 6, 2009, we acquired 100% of Quellan, Inc. (“Quellan”), a privately held leader in the design of high performance analog signal processing integrated circuits, for approximately $13.8 million in cash and contingent consideration of $3.3 million.
Acquisition related costs were approximately $0.9 million in the quarter ended April 2, 2010 and include acquisition costs for Rock and Quellan. We recorded no acquisition related expenses in the quarter ended April 3, 2009. Under the provisions of ASC 805, Business Combinations (SFAS 141R), which was effective for business acquisitions occurring after December 15, 2008, we have recorded acquisition costs in selling, general and administrative expense in the accompanying consolidated financial statements.
The results of operations of all acquirees, which are immaterial individually and in the aggregate, are included in our condensed consolidated statements of operations from the respective dates of the acquisitions.
The preliminary allocation of the aggregate purchase price is summarized as follows:
| Purchases in 2010 | Purchases in 2009 | ||||||
| (in millions) | |||||||
Intangible assets: | |||||||
Definite-lived: developed technologies | $ | 2.3 | $ | 6.2 | |||
Definite-lived: other | — | 2.7 | |||||
Indefinite-lived: goodwill | 2.2 | 1.2 | |||||
Deferred tax assets | — | 9.1 | |||||
Other tangible net assets, excluding cash and cash equivalents | — | (2.1 | ) | ||||
Total purchase price, net of cash and cash equivalents acquired | $ | 4.5 | $ | 17.1 | |||
The definite-lived developed technology purchased will be amortized over a five-year or five and one-half-year life.
Other definite-lived intangible assets include backlog, customer relationships, and intellectual property. These assets have amortization lives ranging from six months to five years.
We are responsible for the preliminary and final valuation estimates. The value of purchased in-process research and development was determined using an income approach. Purchased in-process research and development prior to January 2, 2009 was written off as of the time of acquisition and is shown as a separate line item in the accompanying consolidated statements of operations. The quarter ended April 3, 2009 includes a reversal of previously recorded in-process research and development related to acquisitions prior to January 2, 2009.
Certain acquisitions in 2008 and 2009 contain provisions in the purchase agreements for payment of additional consideration to former stockholders if revenue in excess of a base amount is attained. The maximum payout under these provisions is $28.0 million, based on revenue earned through March 2011. We have a contingent liability of approximately $1.4 million
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INTERSIL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
related to the Quellan purchase. Due to the uncertainty of revenue in excess of the base amounts, we have not accrued any amount for additional consideration for acquisitions prior to January 2, 2009. The amount of the additional consideration, if any, that is earned based on the excess revenue provisions of the agreements for acquisitions prior to January 2, 2009 will be recorded as an increase in goodwill at the time the contingency is resolved.
Pro-forma financial information of the combined entities is not presented due to immateriality of the financial results of the acquired entities, individually and in the aggregate.
Note 9—Goodwill and Purchased Intangibles
Goodwill is an indefinite-lived intangible asset that is not amortized, but instead is tested for impairment annually or more frequently if indicators of impairment exist. The following table summarizes changes in net goodwill balances for our one reportable segment (in millions):
Gross goodwill balance as of January 1, 2010 | $ | 1,469.4 | ||
Accumulated impairment charge | (1,154.7 | ) | ||
Purchase of Rock | 2.2 | |||
Goodwill balance as of April 2, 2010 | $ | 316.9 | ||
We recorded an impairment loss of $1,154.7 million against our goodwill in 2008, calculated as the excess of carrying amount of goodwill over the implied fair value of goodwill in our reporting units. The adjusted carrying amount of goodwill is the new accounting basis.
We perform a goodwill impairment analysis using the two-step method on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The recoverability of goodwill is measured at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair market value of the reporting unit. During 2009, we had two reporting units for purposes of the analysis—analog and mixed signal and power management. The first step of the goodwill impairment test is to identify potential impairment. If the fair value of a reporting unit exceeds its carrying amount, no impairment of the goodwill of the reporting unit is indicated and the second step of the impairment test is unnecessary. However, if the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any.
Goodwill as of April 2, 2010 was $316.9 million. If we experience significant declines in our stock price, market capitalization or future expected cash flows, significant adverse changes in the business climate or continuing slower growth rates, we may need to perform additional impairment analysis of our goodwill in future periods prior to our annual test in the fourth quarter. 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 are definite-lived intangible assets which are amortized on a straight-line basis over their estimated useful lives. Substantially all of our purchased intangibles consist of multiple elements of developed technology which has estimated useful lives of 3 to 11 years. Other purchased intangibles consist of other identifiable assets, primarily customer relationships, with an estimated useful life of five years.
| As of April 2, 2010 | As of January 1, 2010 | |||||||||||
| Gross carrying amount | Accumulated amortization | Gross carrying amount | Accumulated amortization | |||||||||
| (in millions) | ||||||||||||
Definite-lived: developed technologies | $ | 59.3 | $ | 39.3 | $ | 79.7 | $ | 59.6 | ||||
Definite-lived: other | 10.3 | 4.3 | 10.3 | 3.8 | ||||||||
Total | $ | 69.6 | $ | 43.6 | $ | 90.0 | $ | 63.4 | ||||
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INTERSIL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
We recorded amortization expense as follows:
| Quarter ended April 2, 2010 | Quarter ended April 3, 2009 | |||||
| (in thousands) | ||||||
By income statement line item | ||||||
Amortization of purchased intangibles | $ | 2,881 | $ | 3,506 | ||
Cost of revenues | $ | 31 | $ | 187 | ||
Expected amortization expense by year to the end of the current amortization schedule is the following (in millions):
To be recognized in: | |||
Fiscal year 2010 | $ | 10.4 | |
Fiscal year 2011 | 7.3 | ||
Fiscal year 2012 | 6.1 | ||
Fiscal year 2013 | 3.4 | ||
Fiscal year 2014 | 1.6 | ||
Thereafter | 0.1 | ||
Total expected amortization expense | $ | 28.9 | |
We review long-lived assets, including intangible assets subject to amortization, which are our developed technology, backlog, customer relationships and intellectual property, 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.
Note 10—Restructuring
During the year ended January 2, 2009, we initiated restructuring plans to reorganize certain operations, consolidate internal manufacturing facilities, and reduce our global workforce and other operating costs. During the quarter ended April 3, 2009, we recorded expenses of approximately $1.6 million for severance, lease exit, legal and professional costs. All current restructuring plans have been completed.
Other accrued liabilities relating to the restructuring are summarized below (in millions).
Liability balance as of January 1, 2010 | $ | 0.3 | ||
Severance payments | (0.3 | ) | ||
Liability balance as of April 2, 2010 | $ | — | ||
Note 11—Shareholders’ Equity
Dividends—In January 2010, our Board of Directors declared a quarterly dividend of $0.12 per share of common stock. We paid dividends of $14.8 million on February 19, 2010 to shareholders of record as of the close of business on February 9, 2010. In April 2010, our Board of Directors declared a quarterly dividend of $0.12 per share of common stock. The dividend will be paid on May 21, 2010 to shareholders of record as of the close of business on May 11, 2010.
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INTERSIL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Class A Common Stock—Share activity for Class A common stock since January 1, 2010 (shares in thousands):
| Quarter ended April 2, 2010 | ||
Balance as of January 1, 2010 | 122,816 | |
Shares issued under stock plans | 691 | |
Balance as of April 2, 2010 | 123,507 | |
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 generally provide customers with a limited indemnification against intellectual property infringement claims related to our products. We accrue for known indemnification issues and estimate unidentified issues based on historical activity.
Note 13—Segment Information
We report our results in one reportable segment. We design, develop, manufacture and market high-performance analog integrated circuits. Our chief executive officer is our chief operating decision maker.
Note 14—Income Taxes and Discontinued Operations
The table below summarizes activity in unrecognized tax benefits (UTB’s) resulting from uncertain tax positions:
| As of April 2, 2010 | As of April 3, 2009 | ||||||
| (in millions) | |||||||
Beginning balance (includes interest and penalties of $3.2 million as of January 1, 2010) | $ | 32.4 | $ | 8.6 | |||
Increases related to current year tax positions | 2.3 | 0.2 | |||||
Decreases related to current year statute expirations | (1.2 | ) | — | ||||
Ending balance (includes interest and penalties of $2.4 million as of April 2, 2010) | $ | 33.5 | $ | 8.8 | |||
Our remaining significant UTB relates to both domestic and international tax matters. We are currently unable to estimate the amount of reserves that will reverse in the next 12 months.
Tax years from 2005 forward are under examination or remain subject to audit. The major tax jurisdictions in which we operate includes the United States, various individual states and several foreign nations.
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INTERSIL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 15—Recent Accounting Pronouncements
FASB ASC 105-10, “Generally Accepted Accounting Principles” (formerly FASB Statement No. 168, “The FASB Accounting Standards Codification ™ and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162” (the Codification))—In June 2009, the FASB issued the Codification, which was launched on July 1, 2009. The Codification became the single source of authoritative nongovernmental U.S. GAAP, superseding existing FASB, American Institute of Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF) and related literature. The Codification eliminates the GAAP hierarchy contained in SFAS No. 162 and establishes one level of authoritative GAAP. All other literature is considered non-authoritative. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Codification is currently effective and did not impact our condensed consolidated financial statements.
FASB ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements”—In January 2010, the FASB issued guidance to improve the disclosures for Level 1, Level 2 and Level 3 fair value measurements. ASU 2010-06 requires new disclosures for significant transfers in and out of Level 1 and Level 2 fair value measurements, and separately report information about purchases, sales, issuances and settlements of Level 3 fair value measurements. ASU 2010-06 also updates ASC 820-10, Fair Value Measurements and Disclosures, to require an entity to provide fair value measurement disclosures for each class of assets and liabilities. Entities should also provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for Level 1 and Level 2 fair value measurements. ASU 2010-06 is currently effective, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements, which will be effective for interim and annual reporting periods beginning after December 15, 2010. This statement will have no impact on our consolidated results, but will result in additional disclosures on fair value measurements.
Note 16—Subsequent Events
On March 22, 2010, Intersil entered into an Agreement and Plan of Merger to acquire Techwell, Inc. (“Techwell”), a semiconductor company that designs, markets and sells mixed signal integrated circuits for multiple video applications in the security surveillance and automotive infotainment markets.
On April 27, 2010, we completed the acquisition of all of the outstanding shares of Techwell common stock, par value $0.001 per share, and the associated preferred stock purchase rights (together with the Techwell Common Stock, the “Shares”). The acquisition was structured as a two-step transaction, consisting of a tender offer by Intersil for the Shares at a price of $18.50 per share, without interest and less any applicable withholding or stock transfer taxes, followed by the merger of the Intersil and Techwell, with Techwell surviving as an indirect, wholly owned subsidiary of Intersil. Techwell’s common stock ceased to be traded on the NASDAQ Global Select Market on April 27, 2010.
Intersil issued debt of $300 million with a term of 6 years at a floating interest rate of approximately 5% to complete the transaction. The remainder of the purchase price was paid through corporate cash. Intersil also closed on a $75 million credit facility with a term of 3 and one-half years which bears a floating interest rate. We terminated our existing credit facility immediately prior to the Techwell acquisition. At this time, we have no immediate plans to draw on our credit facility.
The initial accounting for the acquisition is incomplete and information regarding allocation of the purchase price has not been determined.
We have evaluated subsequent events through the date these condensed consolidated financial statements were issued.
—End of Unaudited Condensed Consolidated Financial Statements—
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| Item 2. | Management’s Discussion andAnalysis of Financial Condition and Results of Operations |
You should read the following discussion in conjunction with our 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 contains statements relating to expected future results and business trends of Intersil that are based upon our current estimates, expectations and projections about our industry, and upon management’s beliefs, and certain assumptions we have made, that are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will,” and variations of these words or similar expressions are intended to identify “forward-looking statements.” 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.” Such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results may differ materially and adversely from those expressed in any “forward-looking statement” as a result of various factors. These factors include, but are not limited to: industry and global economic and market conditions, such as the cyclical nature of the semiconductor industry and the markets addressed by our and our customers’ products; demand for, and market acceptance of, new and existing products; successful development of new products; the timing of new product introductions; new product performance and quality; the successful integration of acquisitions; manufacturing difficulties, such as the availability and extent of utilization of manufacturing capacity and raw materials; procurement shortages; the failure of our suppliers or outsource providers to perform their obligations in a manner consistent with our expectations; the need for additional capital; pricing pressures and other competitive factors, such as competitor’s new products; competitors with significantly greater financial, technical, manufacturing and marketing resources; changes in product mix; fluctuations in manufacturing yields; product obsolescence; the ability to develop and implement new technologies and to obtain protection of the related intellectual property; legal challenges to our products and technology, such as intellectual property infringement and misappropriation claims; customer service; the extent that customers use our products and services in their business, such as the timing of the subsequent entry of our customers’ products containing our components into production, the size and timing of orders from customers and customer cancellations or shipment delays; changes in import export regulations; legislative, tax, accounting, or regulatory changes or changes in their interpretation; transportation, communication, demand, information technology or supply disruptions based on factors outside our control such as natural disasters, wars and terrorist activities; and exchange rate fluctuations. 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.
Overview
We design, develop, manufacture and market high-performance analog and mixed signal integrated circuits (ICs). We believe our product portfolio addresses some of the fastest growing applications within the high-end consumer, industrial, computing and communications 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 January 1, 2010.
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Results of Operations
Statement of operations data and percentage of revenue for the periods indicated ($ in millions):
| Quarter ended | Quarter ended | |||||||||||||
| April 2, 2010 | April 2, 2010 (% of revenue) | April 3, 2009 | April 3, 2009 (% of revenue) | |||||||||||
Revenue | $ | 189.4 | 100.0 | % | $ | 118.2 | 100.0 | % | ||||||
Cost of revenue | 82.5 | 43.6 | % | 53.0 | 44.9 | % | ||||||||
Gross profit | 106.9 | 56.4 | % | 65.1 | 55.1 | % | ||||||||
Operating costs and expenses | ||||||||||||||
Research and development | 41.7 | 22.0 | % | 32.8 | 27.7 | % | ||||||||
Selling, general and administrative | 32.6 | 17.2 | % | 25.8 | 21.9 | % | ||||||||
Amortization of purchased intangibles | 2.9 | 1.5 | % | 3.5 | 3.0 | % | ||||||||
In-process research and development credit | — | — | % | (0.2 | ) | (0.2 | )% | |||||||
Restructuring and other related charges | — | — | % | 1.6 | 1.3 | % | ||||||||
Operating income | 29.8 | 15.7 | % | 1.7 | 1.4 | % | ||||||||
Gain (loss) on deferred compensation investments, net | 0.3 | 0.2 | % | (0.2 | ) | (0.2 | )% | |||||||
Other-than-temporary impairment losses | (1.1 | ) | (0.6 | )% | — | — | % | |||||||
Interest income, net | 0.5 | 0.3 | % | 1.4 | 1.2 | % | ||||||||
Income before income taxes | 29.6 | 15.6 | % | 2.9 | 2.5 | % | ||||||||
Income tax expense | 1.9 | 0.1 | % | 0.5 | 0.4 | % | ||||||||
Net income | $ | 27.7 | 14.6 | % | $ | 2.4 | 2.0 | % | ||||||
Note: Totals and percentages may not add or calculate precisely due to rounding. We have modified certain amounts in the quarter ended April 3, 2009 to conform to the presentation in the quarter ended April 2, 2010.
Revenue and Gross Profit
Revenue for the quarter ended April 2, 2010 increased $71.2 million or 60.2% to $189.4 million from $118.2 million during the quarter ended April 3, 2009. The increase in sales was broad based and driven by revenue increases from all end markets. Sales into the industrial, computing, communication and consumer end markets increased by 70%, 66%, 52% and 51%, respectively, from the first quarter of 2009.
Revenues by end market were as follows ($ in millions):
| Quarter ended April 2, 2010 | Quarter ended April 3, 2009 | |||||||||||
| % of revenue | % of revenue | |||||||||||
Computing | $ | 61.2 | 32.3 | % | $ | 36.8 | 31.2 | % | ||||
Communication | 45.3 | 23.9 | % | 29.9 | 25.2 | % | ||||||
Industrial | 45.2 | 23.9 | % | 26.6 | 22.5 | % | ||||||
Consumer | 37.7 | 19.9 | % | 24.9 | 21.1 | % | ||||||
Total | $ | 189.4 | 100.0 | % | $ | 118.2 | 100.0 | % | ||||
In aggregate, a 65.2% increase in unit shipments increased net revenue from first quarter of 2009 levels by $77.1 million and average selling prices (ASPs) decreased 3.0%, decreasing revenues by $5.9 million. The trend of declining unit prices, which must be made up by higher unit volumes for sales growth, is normal for the semiconductor industry and we expect it to continue. These trend characteristics are not currently believed to be a material change in the demand or financial return characteristics for our products and are expected to continue into the future.
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Geographically, revenues were derived from the Asia/Pacific, North America and Europe regions as follows:
| April 2, 2010 | April 3, 2009 | |||||
| (% of revenues) | ||||||
Asia/Pacific | 73 | % | 70 | % | ||
North America | 18 | 20 | ||||
Europe | 9 | 10 | ||||
Total | 100 | % | 100 | % | ||
We anticipate that our revenue from Asia/Pacific region customers will continue to grow in percentage terms as that region leads in the manufacture of the finished goods (consumer electronics, computers, communications equipment) in which our products are used. End market demand for those products is global, and therefore, dependent on aggregate global economic metrics and conditions such as personal incomes and business activity and not necessarily on Asian and Pacific Rim regional economic factors.
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, Japan, Taiwan, Singapore, Germany, Netherlands, Thailand, and Malaysia. Sales to customers in China, including Hong Kong, comprised approximately 47% of revenue, followed by the United States (17%) and South Korea (7%) during the quarter ended April 2, 2010. Two distributors that support a wide range of customers around the world accounted for 15% and 10% of our revenues in the quarter ended April 2, 2010. One original design manufacturer accounted for 9% of our revenues for the quarter ended April 2, 2010.
Cost of Revenue and Gross Profit
Cost of revenue consists primarily of purchased materials and services, labor and overhead associated with product manufacturing. During the quarter ended April 2, 2010, gross profit increased $41.8 million or 64.1% to $106.9 million from $65.1 million during the quarter ended April 3, 2009. As a percentage of sales, gross margin was 56.4% during the quarter ended April 2, 2010 compared to 55.1% during the quarter ended April 3, 2009. The increase in gross margin was primarily due to increased sales and higher utilization of resources, as well as fluctuations caused by product sales mix changes at the product family level. Generally, our computing and high-end consumer products have lower gross margins than our industrial and communications products.
We strive to improve gross margins from their present levels by emphasizing new high-margin products and cost saving opportunities in our manufacturing chain. We expect to continue to realize savings from our restructuring initiatives, higher utilizations and our conversion from gold to copper wire in many of our high volume products.
Operating Costs, Expenses and Other Income
Research and Development (R&D)
R&D expenses consist primarily of salaries and costs of employees engaged in product/process research, design and development activities, as well as related subcontracting activities, prototype development, cost of design tools and technology license agreement expenses. R&D expenses increased $8.9 million or 27.2% to $41.7 million during the quarter ended April 2, 2010 from $32.8 million during the quarter ended April 3, 2009. This increase was due primarily to new employees from acquisitions, incentive plans, and lower costs in the first quarter of 2009 due to short-term cost saving initiatives implemented in response to the changing economy.
Selling, General and Administrative (SG&A)
SG&A costs primarily include salary and incentive expenses of employees engaged in marketing and selling, as well as salaries and expenses required to perform our human resource, finance, legal and executive functions. SG&A costs increased by $6.7 million or 26.1% to $32.6 million during the quarter ended April 2, 2010 from $25.8 million during the quarter ended April 3, 2009. This increase was due primarily to acquisition related costs, incentive plans, and lower costs in the first quarter of 2009 due to short-term cost saving initiatives implemented in response to the changing economy.
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Amortization of Purchased Intangible Assets
Amortization of purchased intangible assets decreased $0.6 million or 17.8% to $2.9 million in the quarter ended April 2, 2010 from $3.5 million in the quarter ended April 3, 2009. The decrease resulted primarily from certain balances that became fully amortized, offset by the acquisitions of Quellan in the third quarter of 2009 and Rock in the first quarter of 2010. We expect amortization of current definite-lived intangible asset balances to remain essentially flat in the second quarter, declining gradually in 2010 as certain balances become fully amortized.
Restructuring
In fiscal year 2008, we implemented plans to consolidate our internal foundries, reduce the related workforce and reduce our world-wide workforce by approximately 9%, resulting in an estimated combined annual cost savings between $12 million and $14 million. We recorded no restructuring related charges in the quarter ended April 2, 2010 compared to $1.6 million in the quarter ended April 3, 2009 for employee severance, facility consolidation and other costs associated with our restructuring plans. All current restructuring plans have been completed and we have no remaining restructuring liability.
Gain (loss) on Deferred Compensation Investments, Net
We have a liability for a qualified deferred compensation plan. We maintain a portfolio of approximately $11.0 million of investments 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 selling, general and administrative expense. In general, the compensation expense (benefit) is substantially offset by the gains and losses on the investment. During the quarter ended April 2, 2010, we recorded a gain on deferred compensation investments of $0.3 million and an increase in selling, general and administrative expense of $0.3 million.
Other-Than-Temporary Impairment Losses
During the quarter ended April 2, 2010, we recorded an impairment charge of $1.1 million, before taxes, on certain preferred equity securities whose decline in fair value was determined to be other-than-temporary. We continue to monitor our securities and intend to hold all of these investments until the anticipated recovery in market value occurs.
Interest Income, net
Net interest income decreased to $0.5 million during the quarter ended April 2, 2010, from $1.4 million during the quarter ended April 3, 2009. The decrease is attributable to declining interest rates when compared to the same period last year.
Income Tax
Income tax expense for the quarter ended April 2, 2010 was $1.9 million or 6.5% of income before taxes compared with $0.5 million or 18.1% of income before taxes for the quarter ended April 3, 2009. The quarter ended April 2, 2010 included a one-time discrete benefit resulting from the donation of our Fab facilities in Palm Bay, offset by the expiration of the research tax credit. Excluding these items, the effective tax rate on income was further reduced by a greater portion of income in lower tax jurisdictions. Our tax rate is expected to be approximately 18%-20% in future quarters.
In determining net income, we estimate and exercise judgment in the calculation of tax 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.
Backlog
Our sales are made pursuant to purchase orders that are generally booked up to six months in advance of delivery. Our standard terms and conditions of sale provide that these orders become non-cancelable and non-reschedulable thirty days prior to the most current customer request date (CRD) for standard products and ninety days prior to CRD for semi-custom and custom products. Backlog is influenced by several factors, including market demand, pricing and customer order patterns
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in reaction to product lead times. Additionally, we believe backlog can fall faster than consumption rates in periods of weak end-market demand since production lead times can be shorter. Conversely, we believe backlog can grow faster than consumption in periods of strong end-market demand as cycle and delivery times increase and some customers may increase orders in excess of their current consumption to reduce their own risk of production disruptions.
We had a six-month backlog as of April 2, 2010 of $165.1 million compared to a six-month backlog of $157.4 million as of January 1, 2010 and of $126.9 million as of April 3, 2009. Although not always the case, backlog can be a leading indicator of performance for approximately the next two quarters.
Business Outlook
On April 21, 2010, we announced our outlook for the second quarter of 2010. With a positive book-to-bill in the first quarter and increasing backlog, we expected to see sequential growth in the second quarter. At that time, we expected revenue to increase to $200 million to $208 million. We expected GAAP earnings per diluted share of approximately $0.23 to $0.26. The full announcement can be referenced in the press release that is an exhibit to a Current Report on Form 8-K furnished on April 21, 2010.
Contractual Obligations and Off-Balance Sheet Arrangements
Our contractual obligations and off-balance sheet arrangements have not changed significantly from January 1, 2010. As of April 2, 2010, we had committed to purchase $31.5 million of inventory from suppliers.
Certain acquisitions in 2008 and 2009 contain provisions in the purchase agreements for payment of additional consideration to former stockholders if revenue in excess of a base amount is attained. The maximum payout under these provisions is $28.0 million, based on revenue earned through March 2011. We have a contingent liability of approximately $1.4 million related to the Quellan purchase. Due to the uncertainty of revenue in excess of the base amounts, we have not accrued any amount for additional consideration for acquisitions prior to January 2, 2009.
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; and potential acquisitions. We believe that we have the financial resources necessary to meet business requirements for the next 12 months, including capital expenditures for the expansion or upgrading of worldwide manufacturing capacity, working capital requirements, our dividend program and potential future acquisitions or strategic investments. As of April 2, 2010, our total shareholders’ equity was $1.1 billion. At that date, we had $379.6 million in cash and short-term investments. We had no debt outstanding.
We have $62.4 million in long-term investments, primarily auction rate securities. These securities are composed of approximately $34.6 million of insurance related securities, $9.0 million of corporate credit securities, and $18.8 million of student loan based securities. We continue to accrue and receive interest on the securities based on a contractual rate. The weighted rate is currently approximately 181 basis points above one month LIBOR.
On October 17, 2008, we established a $75 million revolving credit facility with Bank of America, N.A. as administrative agent and certain other banks. This credit line increases our available liquidity and enhances our ability to invest in our business. To date, we have not drawn on the line. We are currently in compliance with all covenants under the agreement.
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Our primary sources and uses of cash during the quarters ended April 2, 2010 and April 3, 2009 were as follows:
| Quarter ended | ||||||||
| April 2, 2010 | April 3, 2009 | |||||||
| (in millions) | ||||||||
Sources of Cash | ||||||||
Existing business performance and activities | ||||||||
Operating activities, including working capital changes | $ | 37 | $ | 14 | ||||
Proceeds from exercise of compensatory stock plans, including tax benefits | 3 | 2 | ||||||
| $ | 40 | $ | 16 | |||||
Uses of Cash | ||||||||
Business improvement investments | ||||||||
Business acquisitions, net | $ | (4 | ) | $ | (1 | ) | ||
Capital expenditures, net of sale proceeds | (2 | ) | (2 | ) | ||||
| $ | (6 | ) | $ | (3 | ) | |||
Returned to shareholders | ||||||||
Dividends paid | (15 | ) | (15 | ) | ||||
| $ | (15 | ) | $ | (15 | ) | |||
Cash/Investment Management Activities | ||||||||
Decrease (increase) in investments and foreign exchange effects | $ | 12 | $ | (16 | ) | |||
Net increase (decrease) in cash and cash equivalents | $ | 31 | $ | (18 | ) | |||
For the quarter ended April 2, 2010, our primary sources of cash were $40 million compared to $16 million in the quarter ended April 3, 2009, an increase of $24 million. We used approximately $2 million for capital expenditures and $4 million for the Rock acquisition. We returned $15 million to shareholders in the form of dividends. Investment balances were decreased by $12 million in the quarter ended April 2, 2010 compared to an increase of $16 million during the quarter ended April 3, 2009, resulting in net cash provided of $31 million overall.
We strive to constantly improve the cash flows from our existing business activities and return the majority of that cash flow to shareholders. We maintain and improve our existing business performance with necessary capital expenditures and acquisitions that may further improve our business and return on investment. Cash, debt, stock or any combination thereof may be issued to fund additional acquisitions to improve our business.
Non-cash Working Capital
Trade accounts receivable, less valuation allowances, increased by $11.6 million to $85.2 million as of April 2, 2010 from $73.6 million as of January 1, 2010. This increase primarily reflects the increased sales in the past quarter compared to the fourth quarter of 2009. Inventories, net of reserves, decreased by $0.9 million to $80.3 million as of April 2, 2010 from $81.2 million as of January 1, 2010.
Capital Expenditures
Capital expenditures were $2.4 million for the quarter ended April 2, 2010 and $2.5 million for the quarter ended April 3, 2009. We anticipate capital expenditures will increase beginning in the second quarter of 2010 as we begin to invest in expanded capacity to meet growing sales demand.
Proceeds from exercises of Stock Options and our Stock Purchase Plan
For the quarter ended April 2, 2010, cash flow from exercises of stock options and related tax benefits and sales under our ESPP increased to approximately $3.4 million as compared with $1.6 million in the quarter ended April 3, 2009. Exercises are decisions of grantees and are influenced by the level of our stock price and by other considerations of grantees. While the level of cash inflow from exercises is difficult to forecast or control, we believe it will remain a secondary source of cash.
Stock Dividends
In January 2010, our Board of Directors declared a quarterly dividend of $0.12 per share of common stock. The dividend was paid on February 19, 2010 to shareholders of record as of the close of business on February 9, 2010. In April 2010, our Board of Directors also declared a dividend of $0.12 per share, to be paid on May 21, 2010 to shareholders of record as of the close of business on May 11, 2010.
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| Item 3. | Quantitativeand 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 could experience 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 short-term investments are subject to three market risks: interest rate risk, credit risk and secondary market risk. Our investments are primarily held in money market funds and auction rate securities (ARS). Some of these investments are insured for credit risk. ARS are subject to the risk that the secondary market might fail to provide the liquidity opportunity at the rate reset points. This risk, which we have recently encountered with regard to our ARS, manifests itself in sponsoring broker-dealers withdrawing from the auction process that provides the rate reset and liquidity. See Note 5 to our unaudited condensed consolidated financial statements for additional quantitative and qualitative details.
For further discussion of the risk related to foreign currency exchange rates and market risk, see our 2009 Annual Report on Form 10-K filed with the SEC on March 2, 2010.
| Item 4. | Controls and Procedures |
(a)Evaluation of Disclosure Controls and Procedures.Our management, with the participation of our Chief Executive Officer, or CEO, and Chief Financial Officer, or 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) as of April 2, 2010. 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 CEO and CFO concluded that, as of April 2, 2010, 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, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (SEC).
(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 Securities Exchange Act) occurred during the fiscal quarter ended April 2, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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| Item 1. | Legal Proceedings |
There were no material legal proceedings filed against Intersil during the quarter ended April 2, 2010, nor were there any material developments in existing legal proceedings to which Intersil is a party. Please reference our 2009 Annual Report on Form 10-K filed with the SEC on March 2, 2010 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 2009 Annual Report on Form 10-K, filed with the SEC on March 2, 2010, 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 |
None.
| Item 3. | Defaults Upon Senior Securities |
None.
| Item 4. | (Removed and Reserved) |
| Item 5. | Other Information |
None.
| Item 6. | Exhibits |
The list of exhibits required by Item 601 of Regulation S-K to be filed as part of this Quarterly Report is incorporated by reference to the Index to Exhibits following the signatures herein.
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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.
INTERSIL CORPORATION |
(Registrant) |
| /S/ JONATHAN A. KENNEDY |
| Jonathan A. Kennedy |
| Chief Financial Officer |
Date: May 7, 2010
Exhibit No. | Description | |
| 3.1 | Amended and Restated Certificate of Incorporation of Intersil Corporation (incorporated by reference to Exhibit 3.01 to the Quarterly Report on Form 10-Q, filed August 9, 2005. | |
| 3.2 | Restated Bylaws of Intersil (incorporated by reference to Exhibit 3.02 to the Quarterly Report on Form 10-Q, filed August 7, 2009) | |
| 4 | Specimen Certificate of Intersil Corporation’s Class A Common Stock (incorporated by reference to Exhibit 4.01 to the Annual Report on Form 10-K, filed on February 27, 2007). | |
| 10 | Office Lease dated March 1, 2010 between MRTP, LLC and Intersil Corporation.* | |
| 31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* | |
| 31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* | |
| 32 | Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* | |
| * | Filed herewith. |
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