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 March 30, 2012
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 | | (I.R.S. Employer Identification No.) |
| |
1001 Murphy Ranch Road Milpitas, California | | 95035 |
(Address of principal executive offices) | | (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. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period the registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
| | | | | | |
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 x No
The number of shares outstanding of the issuer’s classes of common stock as of the close of business on April 26, 2012:
| | |
Title of Each Class | | Number of Shares |
Class A common stock par value $.01 per share | | 127,443,100 |
INTERSIL CORPORATION
INDEX
2
PART I-FINANCIAL INFORMATION
Item 1. | Financial Statements. |
INTERSIL CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | |
| | Quarter ended | |
| | March 30, 2012 | | | April 1, 2011 | |
| | (in thousands, except share and per share data) | |
Revenue | | $ | 156,011 | | | $ | 198,875 | |
Cost of revenue | | | 70,824 | | | | 83,833 | |
| | | | | | | | |
Gross profit | | | 85,187 | | | | 115,042 | |
| | |
Operating costs and expenses: | | | | | | | | |
Research and development | | | 44,383 | | | | 49,709 | |
Selling, general and administrative | | | 34,239 | | | | 35,013 | |
Amortization of purchased intangibles | | | 7,217 | | | | 6,874 | |
Restructuring | | | 1,542 | | | | 2,346 | |
Acquisition-related costs | | | — | | | | 262 | |
| | | | | | | | |
Operating (loss) income | | | (2,194 | ) | | | 20,838 | |
Interest income | | | 188 | | | | 803 | |
Interest expense and fees | | | (2,048 | ) | | | (4,543 | ) |
Gain on deferred compensation investments, net | | | 723 | | | | 208 | |
| | | | | | | | |
(Loss) income before income taxes | | | (3,331 | ) | | | 17,306 | |
Income tax (benefit) expense | | | (11 | ) | | | 3,172 | |
| | | | | | | | |
Net (loss) income | | $ | (3,320 | ) | | $ | 14,134 | |
| | | | | | | | |
(Loss) earnings per share: | | | | | | | | |
Basic | | $ | (0.03 | ) | | $ | 0.11 | |
| | | | | | | | |
Diluted | | $ | (0.03 | ) | | $ | 0.11 | |
| | | | | | | | |
Cash dividends declared per common share | | $ | 0.12 | | | $ | 0.12 | |
| | | | | | | | |
Weighted-average common shares outstanding (in millions): | | | | | | | | |
Basic | | | 126.6 | | | | 124.8 | |
| | | | | | | | |
Diluted | | | 126.6 | | | | 125.0 | |
| | | | | | | | |
See notes to unaudited condensed consolidated financial statements.
3
INTERSIL CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
| | | | | | | | |
| | Quarter ended | |
| | March 30, 2012 | | | April 1, 2011 | |
| | (in thousands) | |
Net (loss) income | | $ | (3,320 | ) | | $ | 14,134 | |
Unrealized gain on available-for-sale investments | | | — | | | | 3,674 | |
Tax effect | | | — | | | | (863 | ) |
Unrealized (losses) gains on interest rate swaps | | | (228 | ) | | | 151 | |
Tax effect | | | 86 | | | | (57 | ) |
Realized losses on interest rate swaps, reclassified to net loss | | | 239 | | | | — | |
Tax effect | | | (90 | ) | | | — | |
Currency translation adjustments | | | 344 | | | | 402 | |
| | | | | | | | |
Comprehensive (loss) income | | $ | (2,969 | ) | | $ | 17,441 | |
| | | | | | | | |
See notes to unaudited condensed consolidated financial statements.
4
INTERSIL CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
| | | | | | | | |
| | March 30, 2012 | | | December 30, 2011 | |
| | (in thousands, except share data) | |
ASSETS | | | | | | | | |
Current Assets: | | | | | | | | |
Cash and cash equivalents | | $ | 389,657 | | | $ | 383,693 | |
Short-term investments | | | — | | | | 26,501 | |
Trade receivables, net of allowances ($17,510 as of March 30, 2012 and $14,640 as of December 30, 2011) | | | 59,965 | | | | 64,874 | |
Inventories | | | 90,200 | | | | 97,889 | |
Prepaid expenses and other current assets | | | 14,760 | | | | 16,140 | |
Deferred income tax asset | | | 40,786 | | | | 47,031 | |
| | | | | | | | |
Total Current Assets | | | 595,368 | | | | 636,128 | |
| | | | | | | | |
Non-current Assets: | | | | | | | | |
Property, plant and equipment, net of accumulated depreciation ($216,931 as of March 30, 2012 and $221,984 as of December 30, 2011) | | | 88,278 | | | | 91,038 | |
Purchased intangibles, net of accumulated amortization ($61,586 as of March 30, 2012 and $67,260 as of December 30, 2011) | | | 104,966 | | | | 112,183 | |
Goodwill | | | 565,424 | | | | 565,424 | |
Deferred income tax asset | | | 80,039 | | | | 73,798 | |
Long-term investments | | | 4,752 | | | | 4,752 | |
Other | | | 85,139 | | | | 85,900 | |
| | | | | | | | |
Total Non-current Assets | | | 928,598 | | | | 933,095 | |
| | | | | | | | |
Total Assets | | $ | 1,523,966 | | | $ | 1,569,223 | |
| | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | |
Current Liabilities: | | | | | | | | |
Trade payables | | $ | 28,566 | | | $ | 27,883 | |
Accrued compensation | | | 38,894 | | | | 41,420 | |
Deferred net revenue | | | 8,054 | | | | 8,585 | |
Other accrued expenses | | | 24,549 | | | | 25,444 | |
Non-income taxes payable | | | 2,371 | | | | 2,178 | |
Income taxes payable | | | 54,306 | | | | 60,575 | |
| | | | | | | | |
Total Current Liabilities | | | 156,740 | | | | 166,085 | |
| | | | | | | | |
Non-current Liabilities: | | | | | | | | |
Long-term debt | | | 175,000 | | | | 200,000 | |
Income taxes payable | | | 96,237 | | | | 93,769 | |
Other non-current liabilities | | | 29,058 | | | | 28,681 | |
| | | | | | | | |
Total Non-current Liabilities | | | 300,295 | | | | 322,450 | |
| | | | | | | | |
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; 126,651,125 shares issued and outstanding as of March 30, 2012 and 126,483,088 shares issued and outstanding as of December 30, 2011 | | | 1,267 | | | | 1,265 | |
Additional paid-in capital | | | 1,699,915 | | | | 1,710,705 | |
Accumulated deficit | | | (635,461 | ) | | | (632,141 | ) |
Accumulated other comprehensive income | | | 1,210 | | | | 859 | |
| | | | | | | | |
Total Shareholders’ Equity | | | 1,066,931 | | | | 1,080,688 | |
| | | | | | | | |
Total Liabilities and Shareholders’ Equity | | $ | 1,523,966 | | | $ | 1,569,223 | |
| | | | | | | | |
See notes to unaudited condensed consolidated financial statements.
5
INTERSIL CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | |
| | Quarter Ended | |
| | March 30, 2012 | | | April 1, 2011 | |
| | (in thousands) | |
OPERATING ACTIVITIES | | | | | | | | |
Net (loss) income | | $ | (3,320 | ) | | $ | 14,134 | |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | | | | |
Depreciation and amortization | | | 12,130 | | | | 12,464 | |
Provisions for inventory obsolescence | | | 1,437 | | | | 1,447 | |
Equity-based compensation | | | 5,339 | | | | 7,006 | |
Tax effect of equity-based awards | | | — | | | | 188 | |
Excess tax benefit received on exercise of equity-based awards | | | (2 | ) | | | (189 | ) |
Gain on sale of property and equipment | | | (54 | ) | | | — | |
Deferred income taxes | | | — | | | | 1,343 | |
Changes in operating assets and liabilities: | | | | | | | | |
Trade receivables | | | 4,909 | | | | 2,925 | |
Inventories | | | 6,252 | | | | 2,302 | |
Prepaid expenses and other current assets | | | 1,379 | | | | 236 | |
Trade payables and accrued liabilities | | | (4,424 | ) | | | (11,016 | ) |
Income taxes | | | (3,802 | ) | | | (2,105 | ) |
Other, net | | | 2,039 | | | | 2,221 | |
| | | | | | | | |
Net cash provided by operating activities | | | 21,883 | | | | 30,956 | |
| | | | | | | | |
INVESTING ACTIVITIES | | | | | | | | |
Proceeds from sales or maturities of short-term investments | | | 26,500 | | | | — | |
Proceeds from sales or issuer calls of long-term investments | | | — | | | | 10,110 | |
Proceeds from sales of property, plant and equipment | | | 55 | | | | — | |
Purchases of property, plant and equipment | | | (1,569 | ) | | | (1,746 | ) |
| | | | | | | | |
Net cash provided by investing activities | | | 24,986 | | | | 8,364 | |
| | | | | | | | |
FINANCING ACTIVITIES | | | | | | | | |
(Tax payments for) proceeds from equity-based awards | | | (599 | ) | | | 2,442 | |
Excess tax benefit received on exercise of equity-based awards | | | 2 | | | | 189 | |
Repayments of long-term debt | | | (25,000 | ) | | | (20,305 | ) |
Dividends paid | | | (15,392 | ) | | | (15,161 | ) |
| | | | | | | | |
Net cash used in financing activities | | | (40,989 | ) | | | (32,835 | ) |
Effect of exchange rates on cash and cash equivalents | | | 84 | | | | 817 | |
| | | | | | | | |
Net increase in cash and cash equivalents | | | 5,964 | | | | 7,302 | |
Cash and cash equivalents as of the beginning of the period | | | 383,693 | | | | 383,016 | |
| | | | | | | | |
Cash and cash equivalents as of the end of the period | | $ | 389,657 | | | $ | 390,318 | |
| | | | | | | | |
See notes to unaudited condensed consolidated financial statements.
6
INTERSIL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Basis of Presentation
Intersil Corporation (“Intersil”) designs, develops, manufactures and markets high-performance analog and mixed-signal integrated circuits (“ICs”) for applications in the global Industrial & Infrastructure, Consumer, and Personal Computing electronics markets.
In our opinion, these interim unaudited condensed consolidated financial statements include all adjustments necessary to present fairly, in all material respects, the financial position, results of operations and cash flows for all periods presented. We prepared these unaudited condensed consolidated financial statements in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, using management estimates where necessary. We derived the December 30, 2011 consolidated balance sheet from our audited consolidated year-end financial statements. You should read this interim report in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 30, 2011.
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 Consumer and Personal Computing markets have historically experienced weaker demand in the first and second fiscal quarters and stronger demand in the third and fourth fiscal quarters. However, recent economic events, acquisitions and the cyclical nature of the industry in which we operate have had a greater impact on quarterly fluctuations in recent years.
Note 2—Investments
We classify bank time deposits as available for sale (“AFS”) and record them at fair value.
Our investments are classified as follows:
| | | | | | | | | | | | | | | | | | | | |
| | As of March 30, 2012 | |
| | Amortized cost | | | Gross unrealized gains | | | Gross unrealized losses | | | Fair value | | | Maturity range (in years) | |
| | (in millions) | | | | |
Long-term Investments | | | | | | | | | | | | | | | | | | | | |
Bank time deposits (AFS) | | $ | 4.8 | | | $ | — | | | $ | — | | | $ | 4.8 | | | | 1-2 | |
| | | | | | | | | | | | | | | | | | | | |
| |
| | As of December 30, 2011 | |
| | Amortized cost | | | Gross unrealized gains | | | Gross unrealized losses | | | Fair value | | | Maturity range (in years) | |
| | (in millions) | |
Short-term Investments | | | | | | | | | | | | | | | | | | | | |
Bank time deposits (AFS) | | $ | 26.5 | | | $ | — | | | $ | — | | | $ | 26.5 | | | | <1 | |
| | | | | | | | | | | | | | | | | | | | |
Long-term Investments | | | | | | | | | | | | | | | | | | | | |
Bank time deposits (AFS) | | $ | 4.8 | | | $ | — | | | $ | — | | | $ | 4.8 | | | | 1-2 | |
| | | | | | | | | | | | | | | | | | | | |
There were no recognized gains or losses on investments included in the statement of operations during the quarters ended March 30, 2012 or April 1, 2011.
7
Trading Investments
| | | | | | | | |
| | Quarter ended | |
| | March 30, 2012 | | | April 1, 2011 | |
| | (in millions) | |
By consolidated statement of operations line item | | | | | | | | |
Gain on deferred compensation investments, net | | $ | 0.7 | | | $ | 0.2 | |
| | | | | | | | |
Selling, general and administrative expense | | $ | 0.8 | | | $ | 0.3 | |
| | | | | | | | |
| | |
| | March 30, 2012 | | | December 30, 2011 | |
| | (in millions) | |
Balance sheet impact | | | | | | | | |
Deferred compensation assets (trading) | | $ | 11.6 | | | $ | 11.2 | |
| | | | | | | | |
Deferred compensation liability | | $ | 12.4 | | | $ | 12.0 | |
| | | | | | | | |
Note 3—Fair Value Measurements
We use the following methods and assumptions to estimate the fair value of each class of financial instruments:
| • | | Due to their short duration, the carrying amount of cash and cash equivalents, receivables, prepaid expenses, accounts payable, accrued expenses and other current liabilities provide a reasonable estimate of fair value. |
| • | | Borrowings under our revolving credit facility as of March 30, 2012 and December 30, 2011 have variable interest rates that reflect currently available terms and conditions for similar debt. The carrying amount of these borrowings provides a reasonable estimate of fair value. |
We determine fair value on the following assets and liabilities using these input levels (in millions):
| | | | | | | | | | | | |
| | Fair value as of March 30, 2012 using: | |
| | Total | | | Quoted prices in active markets for identical assets (Level 1) | | | Significant other observable inputs (Level 2) | |
Assets | | | | | | | | | | | | |
Prepaid expenses and other current assets: | | | | | | | | | | | | |
Foreign exchange options | | $ | 0.3 | | | | — | | | $ | 0.3 | |
Long-term investments: | | | | | | | | | | | | |
Bank time deposits | | | 4.8 | | | | — | | | | 4.8 | |
Other non-current assets: | | | | | | | | | | | | |
Deferred compensation investments | | | 11.6 | | | $ | 1.0 | | | | 10.6 | |
| | | | | | | | | | | | |
Total assets measured at fair value | | $ | 16.7 | | | $ | 1.0 | | | $ | 15.7 | |
| | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | |
Other accrued expenses: | | | | | | | | | | | | |
Interest rate swap | | $ | 0.8 | | | $ | — | | | $ | 0.8 | |
| | | | | | | | | | | | |
8
| | | $000.0 | | | | $000.0 | | | | $000.0 | |
| | Fair value as of December 30, 2011 using: | |
| | Total | | | Quoted prices in active markets for identical assets (Level 1) | | | Significant other observable inputs (Level 2) | |
Assets | | | | | | | | | | | | |
Short-term investments: | | | | | | | | | | | | |
Bank time deposits | | $ | 26.5 | | | $ | — | | | $ | 26.5 | |
Prepaid expenses and other current assets: | | | | | | | | | | | | |
Foreign exchange options | | | 1.1 | | | | — | | | | 1.1 | |
Long-term investments: | | | | | | | | | | | | |
Bank time deposits | | | 4.8 | | | | — | | | | 4.8 | |
Other non-current assets: | | | | | | | | | | | | |
Deferred compensation investments | | | 11.2 | | | | 1.4 | | | | 9.8 | |
| | | | | | | | | | | | |
Total assets measured at fair value | | $ | 43.6 | | | $ | 1.4 | | | $ | 42.2 | |
| | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | |
Other accrued expenses: | | | | | | | | | | | | |
Interest rate swap | | $ | 0.6 | | | $ | — | | | $ | 0.6 | |
| | | | | | | | | | | | |
For actively traded securities, bank time deposits, foreign exchange contracts and interest rate swaps, we generally rely upon the valuations as provided by the third party custodian of these assets or liabilities. There were no transfers into or out of Level 1 or Level 2 financial assets and liabilities during the quarters ended March 30, 2012 and April 1, 2011.
Note 4—Derivative Instruments and Hedging Activities
The fair value of our hedging instruments in the consolidated balance sheets was as follows (in millions):
| | | | | | | | | | |
| | | | Fair value as of | |
| | Balance sheet location | | March 30, 2012 | | | December 30, 2011 | |
Derivatives Not Designated as Hedging Instruments | | | | | | | | | | |
Asset Derivatives | | | | | | | | | | |
Foreign exchange options | | Prepaid expenses and other current assets | | $ | 0.3 | | | $ | 1.1 | |
| | | | | | | | | | |
Derivatives Designated as Hedging Instruments | | | | | | | | | | |
Liability Derivatives | | | | | | | | | | |
Interest rate swap agreements | | Other accrued expenses | | $ | 0.8 | | | $ | 0.6 | |
| | | | | | | | | | |
9
The table below describes total open foreign exchange contracts as of March 30, 2012 and December 30, 2011 (all are options to sell foreign currencies):
| | | | | | | | | | | | |
Notional Amount of Open Foreign Currency Contracts | | Euros | | | U.S. Dollars | | | Range of Maturities | |
| | (€ and $ in millions) | |
March 30, 2012 | | € | 14.5 | | | $ | 18.9 | | | | 1 – 6 months | |
December 30, 2011 | | € | 15.0 | | | $ | 20.2 | | | | 1 – 6 months | |
Interest Rate Exposure Management—In connection with the extinguishment of our previous debt facility (see Note 8), we terminated our prior interest rate hedge transaction and settled the interest rate swap agreement in 2011 for $3.2 million. As of March 30, 2012, we have a loss of $1.7 million, net of tax, remaining in other comprehensive income (“OCI”) which will be reclassified into earnings as a component of interest expense in a manner commensurate with the forecasted interest payments. The loss in OCI will be fully reclassified by the fourth quarter of 2013, the original maturity date of the terminated interest rate swap agreement. During the third quarter of 2011, we entered into certain interest rate swap transactions with a notional value of $150.0 million to hedge a portion of the risk of changes in the benchmark interest rate of the one-month London Interbank Offered Rate (“LIBOR”) related to our new outstanding revolving credit facility. Under the terms of the interest rate swaps, we will effectively convert $150.0 million of the balance on our revolving credit facility from a variable rate to a fixed rate through August 8, 2016.
As of March 30, 2012, we expect $0.7 million of losses associated with our cash flow hedges, net of tax, to be reclassified from Accumulated OCI into earnings within the next twelve months.
Note 5—Inventories
Inventories are summarized below (in millions):
| | | | | | | | |
| | March 30, 2012 | | | December 30, 2011 | |
Finished products | | $ | 31.7 | | | $ | 34.6 | |
Work in process | | | 54.2 | | | | 58.6 | |
Raw materials | | | 4.3 | | | | 4.7 | |
| | | | | | | | |
Total inventories | | $ | 90.2 | | | $ | 97.9 | |
| | | | | | | | |
Note 6—Goodwill and Purchased Intangibles
Goodwill—The following table summarizes changes in the net goodwill balance for our one reportable segment (in millions):
| | | | |
| | March 30, 2012 | |
Gross goodwill balance as of beginning of period | | $ | 1,720.1 | |
Accumulated impairment charge (recorded in 2008) | | | (1,154.7 | ) |
| | | | |
Net goodwill balance as of beginning of period | | | 565.4 | |
| | | | |
Adjustments to goodwill | | | — | |
| | | | |
Goodwill balance as of end of period | | $ | 565.4 | |
| | | | |
We performed our annual test of impairment as of September 30, 2011 and determined the fair value of the reporting units was in excess of the carrying value. We will perform our next annual test of impairment in the fourth quarter of 2012. If we experience significant declines in our stock price, market capitalization or future expected cash flows, significant adverse changes in the business climate or 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 impairment charges.
Purchased Intangibles—Substantially all of our purchased intangibles consist of multiple elements of developed technology which have estimated useful lives of three to 11 years. Other purchased intangibles consist of other identifiable assets, primarily customer relationships with an estimated useful life of six years.
10
| | | | | | | | | | | | | | | | |
| | March 30, 2012 | | | December 30, 2011 | |
| | Gross carrying amount | | | Accumulated amortization | | | Gross carrying amount | | | Accumulated amortization | |
| | (in millions) | |
Definite-lived: developed technologies | | $ | 113.6 | | | $ | 43.6 | | | $ | 125.9 | | | $ | 51.3 | |
Definite-lived: other | | | 53.0 | | | | 18.0 | | | | 53.6 | | | | 16.0 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 166.6 | | | $ | 61.6 | | | $ | 179.5 | | | $ | 67.3 | |
| | | | | | | | | | | | | | | | |
We recorded amortization expense as follows (in millions):
| | | | | | | | |
| | Quarter ended | |
By statement of operations line item | | March 30, 2012 | | | April 1, 2011 | |
Amortization of purchased intangibles | | $ | 7.2 | | | $ | 6.9 | |
| | | | | | | | |
Expected amortization expense remaining by year to the end of the current amortization schedule is the following (in millions):
| | | | |
To be recognized in: | | | |
Fiscal year 2012 | | $ | 21.1 | |
Fiscal year 2013 | | | 25.6 | |
Fiscal year 2014 | | | 23.8 | |
Fiscal year 2015 | | | 16.8 | |
Fiscal year 2016 | | | 9.0 | |
Thereafter | | | 8.7 | |
| | | | |
Total expected amortization expense | | $ | 105.0 | |
| | | | |
There were no events that would trigger an impairment test of purchased intangibles during the periods presented herein.
Note 7—Income Taxes
We are subject to filing requirements in the United States federal jurisdiction and in many state and foreign jurisdictions for numerous consolidated and separate entity income tax returns. We are no longer subject to examination in the U.S. for years prior to 2005.
The table below summarizes activity in unrecognized tax benefits (“UTBs”) (in millions):
| | | | |
| | March 30, 2012 | |
Beginning balance (includes $12.0 million of interest and penalties as of December 30, 2011) | | $ | 154.4 | |
Increases related to prior year tax positions | | | 1.2 | |
| | | | |
Ending balance (includes $13.2 million of interest and penalties as of March 30, 2012) | | $ | 155.6 | |
| | | | |
The UTB relates primarily to a provision established at the completion of field work on an Internal Revenue Service (“IRS”) tax audit for tax years 2005 through 2007, in addition to tax years 2008 and 2009 currently being audited. We are currently contesting the matter for tax years 2005 through 2007 through the IRS Appeals Office. While the audit covered a number of different issues, the provision is largely due to the intercompany pricing of goods and services between different tax jurisdictions. As the final resolution of the appeals process remains uncertain, we continue to provide for the uncertain tax positions based on our best estimate of the ultimate outcome.
11
Within the next 12 months, we estimate that our UTB balance will be reduced by approximately $59 million related to the audit of tax years 2005 through 2007.
Note 8—Long-Term Debt
On September 1, 2011, we established a new five-year, $325.0 million revolving credit facility (the “Facility”). This Facility replaced our previous $300.0 million term-loan facility and $75.0 million revolving credit facility. The Facility matures on September 1, 2016, and is payable in full upon maturity. We may request to increase the Facility by up to $75.0 million. Under the Facility, $25.0 million is available for the issuance of standby letters of credit, $10.0 million is available as swing line loans and $50.0 million is available for multicurrency borrowings. Amounts repaid under the Facility may be reborrowed.
The Facility is secured by a first priority lien and security interest in (a) all of the equity interests and intercompany debt of our direct and indirect subsidiaries, except, in the case of foreign subsidiaries, to the extent that such pledge would be prohibited by applicable law or would result in adverse tax consequences, (b) all of our present and future tangible and intangible assets and our direct and indirect subsidiaries (other than immaterial subsidiaries and foreign subsidiaries) and (c) all proceeds and products of the property and assets described in clauses (a) and (b) above. Our obligations under the Facility are guaranteed by our direct and indirect wholly-owned subsidiaries (other than immaterial subsidiaries and foreign subsidiaries).
At our option, loans under the Facility will bear stated interest based on the Base Rate or Eurocurrency Rate, in each case plus the Applicable Rate (respectively, as defined in the Credit Agreement in Exhibit 10). The Base Rate will be, for any day, a fluctuating rate per annum equal to the highest of (a) 1/2 of 1.00% per annum above the Federal Funds Rate (as defined in the Credit Agreement), (b) Bank of America’s prime rate and (c) the Eurodollar Rate for a term of one month plus 1.00%. Eurodollar borrowings may be for one, two, three or six months (or such period that is 12 months or less, requested by Intersil and consented to by all the Lenders) and will be at an annual rate equal to the period-applicable Eurodollar Rate plus the Applicable Rate. The Applicable Rate for all revolving loans is based on a pricing grid ranging from 0.75% to 1.75% per annum for Base Rate loans and 1.75% to 2.75% for Eurocurrency Rate loans based on Intersil’s Consolidated Leverage Ratio (as defined in the Credit Agreement).
| | | | | | | | |
| | March 30, 2012 | | | December 30, 2011 | |
| | ($ in millions) | |
Outstanding balance | | | | | | | | |
Revolving credit facility | | $ | 175.0 | | | $ | 200.0 | |
| | | | | | | | |
Actual interest rate in effect | | | 2.24 | % | | | 2.52 | % |
| | | | | | | | |
| |
| | Quarter ended | |
| | March 30, 2012 | | | April 1, 2011 | |
| | ($ in millions) | |
Cash paid for interest | | $ | 1.2 | | | $ | 3.6 | |
| | | | | | | | |
Weighted-average interest rate (pre-tax) | | | 2.46 | % | | | 4.75 | % |
| | | | | | | | |
The aggregate annual principle payments of long-term debt remaining as of March 30, 2012 are presented in the following table (in millions):
| | | | |
Fiscal years 2012-2015 | | $ | — | |
Fiscal year 2016 | | | 175.0 | |
| | | | |
Total debt outstanding | | $ | 175.0 | |
| | | | |
12
Letters of Credit—We issue letters of credit during the ordinary course of business through major financial institutions as required by certain vendor contracts. We had outstanding letters of credit totaling $2.6 million as of March 30, 2012 and December 30, 2011. The standby letters of credit are secured by $2.8 million of long-term bank time deposits.
Note 9—Shareholders’ Equity
Dividends—In February 2012, our Board of Directors declared a quarterly dividend of $0.12 per share of common stock. We paid dividends of $15.2 million on February 24, 2012 to shareholders of record as of the close of business on February 14, 2012. In April 2012, our Board of Directors declared a quarterly dividend of $0.12 per share of common stock. The dividend will be paid on May 25, 2012 to shareholders of record as of the close of business on May 15, 2012.
Class A Common Stock—Share activity for Class A common stock since December 30, 2011 (in thousands):
| | | | |
Balance as of December 30, 2011 | | | 126,483 | |
Shares issued under stock plans, net of shares withheld for taxes | | | 168 | |
| | | | |
Balance as of March 30, 2012 | | | 126,651 | |
| | | | |
Note 10—Equity-Based Compensation
Grant Date Fair Values and Underlying Assumptions; Contractual Terms
For options granted, we estimated the fair value of each stock option (“Option”) as of the date of grant with the following assumptions:
| | | | |
| | Quarter ended |
| | March 30, 2012 | | April 1, 2011 |
Range of expected volatilities | | 36.7 – 40.2% | | 36.9 – 39.0% |
Weighted-average volatility | | 37.4% | | 37.0% |
Range of dividend yields | | 4.1 – 4.7% | | 3.1 – 3.9% |
Weighted-average dividend yield | | 4.3% | | 3.8% |
Range of risk-free interest rates | | 1.0 – 1.5% | | 1.9 – 2.3% |
Weighted-average risk-free interest rate | | 1.2% | | 2.2% |
Range of expected lives, in years | | 5.5 – 5.6 | | 5.3 – 5.5 |
Weighted-average expected life, in years | | 5.5 | | 5.4 |
The following table represents the weighted-average fair value compensation cost per share of restricted and deferred stock awards (“Awards”) granted:
| | | | | | | | |
| | Quarter ended | |
| | March 30, 2012 | | | April 1, 2011 | |
Options | | $ | 2.57 | | | $ | 3.03 | |
| | | | | | | | |
Awards | | $ | 11.21 | | | $ | 12.50 | |
| | | | | | | | |
Aggregate | | $ | 5.55 | | | $ | 5.73 | |
| | | | | | | | |
13
Equity-Based Compensation Summary
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Options | | | Awards | | | Aggregate Information | |
| | Shares | | | Weighted- Average Exercise Price | | | Weighted- Average Remaining Contract Lives | | | Shares | | | Aggregate Intrinsic Value | | | Aggregate Unrecognized Compensation Cost | |
| | (in thousands) | | | (per share) | | | (in years) | | | (in thousands) | | | (in millions) | | | (in millions) | |
Outstanding as of December 30, 2011 | | | 13,948 | | | $ | 16.21 | | | | 4.1 | | | | 3,678 | | | | | | | | | |
Granted | | | 116 | | | | 11.22 | | | | 6.9 | | | | 61 | | | | | | | | | |
Exercised(1) | | | (28 | ) | | | 8.16 | | | | 2.6 | | | | (221 | ) | | | | | | | | |
Canceled | | | (450 | ) | | | 19.89 | | | | 0.9 | | | | (81 | ) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding as of March 30, 2012 | | | 13,586 | | | $ | 16.06 | | | | 3.9 | | | | 3,437 | | | $ | 39.4 | | | $ | 32.1 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
As of March 30, 2012 | | | | | | | | | | | | | | | | | | | | | | | | |
Exercisable/vested(1) | | | 7,747 | | | $ | 18.44 | | | | 2.7 | | | | 76 | | | $ | 1.5 | | | $ | — | |
Unexercisable/unvested | | | 5,839 | | | $ | 12.90 | | | | 5.5 | | | | 3,361 | | | $ | 37.9 | | | $ | 32.1 | |
Number vested and expected to ultimately vest | | | 13,250 | | | $ | 16.15 | | | | 3.9 | | | | 2,417 | | | $ | 27.9 | | | | | |
(1) | Awards exercised are those that have reached full vested status and have been delivered to the recipients as a taxable event due to elective deferral, available in the case of deferred stock units. Deferred stock units for which the deferral is elected timely are vested but still outstanding as Awards. Total un-issued shares related to deferred stock units as of March 30, 2012 were 76,000 shares as shown in the Awards column as Exercisable/vested. |
| | | | | | | | |
Additional Disclosures | | Quarter ended | |
| | March 30, 2012 | | | April 1, 2011 | |
| | ($ in millions, share data in thousands) | |
Shares issued under the employee stock purchase plan | | | — | | | | 326 | |
| | | | | | | | |
Aggregate intrinsic value of stock options exercised | | $ | 0.1 | | | $ | 0.7 | |
| | | | | | | | |
Financial Statement Effects and Presentation—The following table shows total equity-based compensation expense for the periods indicated that are included in the unaudited condensed consolidated statement of operations (in millions):
| | | | | | | | |
| | Quarter ended | |
| | March 30, 2012 | | | April 1, 2011 | |
By statement of operations line item | | | | | | | | |
Cost of revenue | | $ | 0.4 | | | $ | 0.5 | |
Research and development | | | 3.0 | | | | 4.7 | |
Selling, general and administrative | | | 1.9 | | | | 1.8 | |
By stock type | | | | | | | | |
Stock options | | $ | 2.4 | | | $ | 2.8 | |
Restricted and deferred stock awards | | | 2.6 | | | | 3.9 | |
Employee stock purchase plan | | | 0.3 | | | | 0.3 | |
| | | | | | | | |
| | March 30, 2012 | | | December 30, 2011 | |
Equity-based compensation capitalized in inventory | | $ | 0.7 | | | $ | 0.8 | |
| | | | | | | | |
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Performance-based Grants
| | | | | | | | |
| | March 30, 2012 | |
| | Options | | | Awards | |
| | (in thousands) | |
Performance-based units outstanding | | | 889.4 | | | | 849.4 | |
Maximum shares that could be issued assuming the highest level of performance | | | 1,334.1 | | | | 1,274.1 | |
Performance-based shares expected to vest | | | 713.7 | | | | 312.8 | |
Amount to be recognized as compensation cost over the performance period | | $ | 1,546.9 | | | $ | 1,669.3 | |
Note 11—(Loss) Earnings Per Share
The following table sets forth the computation of basic and diluted (loss) earnings per share (in thousands, except per share amounts):
| | | | | | | | |
| | Quarter ended | |
| | March 30, 2012 | | | April 1, 2011 | |
Numerator: | | | | | | | | |
Net (loss) income to common shareholders | | $ | (3,320 | ) | | $ | 14,134 | |
| | | | | | | | |
Denominator: | | | | | | | | |
Denominator for basic (loss) earnings per share—weighted-average common shares | | | 126,612 | | | | 124,778 | |
Effect of Options and Awards | | | — | | | | 230 | |
| | | | | | | | |
Denominator for diluted (loss) earnings per share adjusted—weighted-average common shares | | | 126,612 | | | | 125,008 | |
| | | | | | | | |
(Loss) earnings per share: | | | | | | | | |
Basic | | $ | (0.03 | ) | | $ | 0.11 | |
| | | | | | | | |
Diluted | | $ | (0.03 | ) | | $ | 0.11 | |
| | | | | | | | |
Anti-dilutive shares not included in the above calculations: | | | | | | | | |
Awards | | | 3,437 | | | | 1,128 | |
| | | | | | | | |
Options | | | 13,586 | | | | 15,517 | |
| | | | | | | | |
Note 12—Segment Information
We report our results in one reportable segment. We design, develop, manufacture and market high-performance analog and mixed-signal integrated circuits. Our chief executive officer is our chief operating decision-maker.
Note 13—Legal Matters and Indemnifications
Legal Matters—We are currently party to various claims and legal proceedings. In our opinion, no material loss is anticipated from such claims and proceedings.
Indemnifications—We incur indemnification obligations for intellectual property infringement claims related to our products. We accrue for known indemnification issues and estimate unidentified issues based on historical activity.
Note 14—Recent Accounting Pronouncements
Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income”—In June 2011, the FASB issued ASU 2011-05. ASU No. 2011-05 amends existing guidance by allowing only two options for presenting the components of net income and OCI: (1) in a single continuous financial statement, statement of comprehensive income or (2) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of OCI. Also, items that are reclassified from OCI to net income must be presented on the face of the financial statements.
15
ASU No. 2011-05 requires retrospective application, and it is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. Implementation of this statement did not have a material impact on our financial statements.
FASB ASU 2011-08, “Intangibles – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment”—In September 2011, the FASB issued ASU 2011-08. ASU No. 2011-08 amends existing guidance by permitting an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. Under the amendments in this ASU, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. ASU 2011-08 will be effective for interim and annual periods beginning on or after December 15, 2011, with early adoption permitted. We do not anticipate ASU 2011-08 will have a material impact on our financial statements.
—End of Unaudited Condensed Consolidated Financial Statements—
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
You should read the following discussion in conjunction with our unaudited condensed consolidated financial statements, including the notes thereto. Except for historical information, the discussions in this section contain forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed below.
Forward Looking Statements
This Quarterly Report on Form 10-Q contains statements relating to expected future results and business trends of Intersil Corporation (“Intersil”) that are based upon our current estimates, expectations, assumptions and projections about our industry, as well as upon certain views and beliefs held by management, that are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995, amended. Forward-looking statements generally can be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “will be,” “will continue,” “will likely result,” and similar expressions. In addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances, including any underlying assumptions, are “forward-looking statements.” These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements . These factors include, but are not limited to:
| • | | 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; |
| • | | global economic weakness, including insufficient credit available for our customers to purchase our products; |
| • | | successful development of new products; |
| • | | the timing of new product introductions and new product performance and quality; |
| • | | manufacturing difficulties, such as the availability, cost and extent of utilization of manufacturing capacity and raw materials; |
| • | | the failure of our suppliers or outsource providers to perform their obligations in a manner consistent with our expectations; |
| • | | pricing pressures and other competitive factors, such as competitors’ new products; |
| • | | changes in product mix; |
| • | | legal challenges to our products and technology, such as intellectual property infringement and misappropriation claims; |
| • | | the need for additional capital; |
| • | | legislative, tax, accounting, or regulatory changes or changes in their interpretation; |
| • | | the ability to develop and implement new technologies and to obtain protection of the related intellectual property; |
| • | | the successful integration of acquisitions; |
| • | | demand for, and market acceptance of, new and existing products; |
| • | | the extent and timing that customers order and use our products and services in their production or business; |
| • | | competitors with significantly greater financial, technical, manufacturing and marketing resources; |
| • | | fluctuations in manufacturing yields; |
| • | | transportation, communication, demand, information technology or supply disruptions based on factors outside our control such as natural disasters, wars, and terrorist activities; |
| • | | changes in import export regulations; 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.
17
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 Industrial & Infrastructure, Consumer, and Personal Computing markets.
Critical Accounting Policies
You should refer to the disclosures regarding critical accounting policies in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2011.
Results of Operations
Statement of operations data and percentage of revenue for the periods ($ in millions; % of revenue):
| | | | | | | | | | | | | | | | |
| | Quarter ended | |
| | March 30, 2012 | | | April 1, 2011 | |
Revenue | | $ | 156.0 | | | | 100.0 | % | | $ | 198.9 | | | | 100.0 | % |
Cost of revenue | | | 70.8 | | | | 45.4 | % | | | 83.8 | | | | 42.2 | % |
| | | | | | | | | | | | | | | | |
Gross profit | | | 85.2 | | | | 54.6 | % | | | 115.0 | | | | 57.8 | % |
Operating costs and expenses: | | | | | | | | | | | | | | | | |
Research and development | | | 44.4 | | | | 28.4 | % | | | 49.7 | | | | 25.0 | % |
Selling, general and administrative | | | 34.2 | | | | 21.9 | % | | | 35.0 | | | | 17.6 | % |
Amortization of purchased intangibles | | | 7.2 | | | | 4.6 | % | | | 6.9 | | | | 3.5 | % |
Restructuring | | | 1.5 | | | | 1.0 | % | | | 2.3 | | | | 1.2 | % |
Acquisition-related costs | | | — | | | | — | % | | | 0.2 | | | | 0.1 | % |
| | | | | | | | | | | | | | | | |
Operating (loss) income | | | (2.2 | ) | | | (1.4 | )% | | | 20.8 | | | | 10.5 | % |
Interest income | | | 0.2 | | | | 0.1 | % | | | 0.8 | | | | 0.4 | % |
Interest expense and fees | | | (2.0 | ) | | | (1.3 | )% | | | (4.5 | ) | | | (2.3 | )% |
Gain on deferred compensation investments, net | | | 0.7 | | | | 0.5 | % | | | 0.2 | | | | 0.1 | % |
| | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | | (3.3 | ) | | | (2.1 | )% | | | 17.3 | | | | 8.7 | % |
Income tax expense | | | — | | | | — | % | | | 3.2 | | | | 1.6 | % |
| | | | | | | | | | | | | | | | |
Net (loss) income | | $ | (3.3 | ) | | | (2.1 | )% | | $ | 14.1 | | | | 7.1 | % |
| | | | | | | | | | | | | | | | |
Note: Totals and percentages may not add or calculate precisely due to rounding. We have modified end market data below in the quarter ended April 1, 2011 to conform to the presentation in the quarter ended March 30, 2012, which we feel better reflects the different characteristics of our end markets. Historical data of revenues in each of these end markets is included with our Current Report on Form 8-K, furnished on April 25, 2012.
Revenue and Gross Profit
Revenue for the quarter ended March 30, 2012 decreased $42.9 million or 21.6% to $156.0 million from $198.9 million during the quarter ended April 1, 2011. The decrease in sales was broad-based in each of our end markets. Sales into the consumer market decreased 28.2% compared to the quarter ended April 1, 2011, while sales into the personal computing market decreased 24.4% and sales into the industrial and infrastructure market decreased 17.5%.
Revenues by end market were as follows ($ in millions):
| | | | | | | | | | | | | | | | |
| | Quarter ended | |
| | March 30, 2012 | | | April 1, 2011 | |
| | Revenue | | | % of Revenue | | | Revenue | | | % of Revenue | |
Industrial & Infrastructure | | $ | 86.9 | | | | 55.7 | % | | $ | 105.4 | | | | 53.0 | % |
Personal Computing | | | 39.4 | | | | 25.2 | % | | | 52.1 | | | | 26.2 | % |
Consumer | | | 29.7 | | | | 19.1 | % | | | 41.4 | | | | 20.8 | % |
| | | | | | | | | | | | | | | | |
Total | | $ | 156.0 | | | | 100.0 | % | | $ | 198.9 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | |
18
In aggregate, a 21.2% decrease in unit shipments decreased net revenue from first quarter of 2011 levels by $42.2 million and average selling prices (“ASPs”) decreased 0.4%, decreasing revenues by $0.7 million. Declining sales prices at the product level have occurred within the semiconductor industry for much of its existence. While individual products generally experience ASP declines over time, we endeavor to continually introduce new products which typically enter the market at prices higher than existing products. Fluctuations in ASPs are expected to continue into the future.
Geographically, year-to-date revenues were derived from the Asia/Pacific, North America and Europe regions as follows ($ in millions):
| | | | | | | | | | | | | | | | |
| | Quarter ended | |
| | March 30, 2012 | | | April 1, 2011 | |
| | Revenue | | | % of Revenue | | | Revenue | | | % of Revenue | |
Asia/Pacific | | $ | 121.4 | | | | 77.8 | % | | $ | 152.7 | | | | 76.8 | % |
North America | | | 22.8 | | | | 14.6 | % | | | 28.3 | | | | 14.2 | % |
Europe and other | | | 11.8 | | | | 7.6 | % | | | 17.9 | | | | 9.0 | % |
| | | | | | | | | | | | | | | | |
Total | | $ | 156.0 | | | | 100.0 | % | | $ | 198.9 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | |
We anticipate that our revenue from Asia/Pacific region customers will continue to grow as that region leads in the manufacture of the finished goods (consumer electronics, computers and 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, Germany, Japan, Taiwan, Singapore, Thailand, Mexico, and Malaysia. Sales to customers in China (including Hong Kong) comprised approximately 57.1% of revenue, followed by the United States (13.9%) and South Korea (8.2%) during the quarter ended March 30, 2012. Two distributors that support a wide range of customers around the world accounted for 14.8% and 13.1% of our revenues in the quarter ended March 30, 2012. Two original design manufacturers accounted for 8.8% and 7.8% of our revenues for the quarter ended March 30, 2012.
Cost of Revenue and Gross Profit
Cost of revenue consists primarily of purchased materials and services, labor, overhead and depreciation associated with manufacturing pertaining to products sold. During the quarter ended March 30, 2012, gross profit decreased $29.9 million or 26.0% to $85.2 million from $115.0 million during the quarter ended April 1, 2011. As a percentage of sales, gross margin was 54.6% during the quarter ended March 30, 2012 compared to 57.8% during the quarter ended April 1, 2011. The decrease in gross margin was primarily due to lower internal utilization and product sales mix changes at the product family level. Generally, our personal computing and consumer products have lower gross margins than our industrial and infrastructure 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. However, recent declines in sales have affected our internal utilization, exerting downward pressure on margins.
Operating Costs and Expenses
Research and Development (“R&D”)
R&D expenses consist primarily of salaries and expenses of employees engaged in product/process research, design and development activities, as well as related subcontracting activities, prototype development, cost of design tools and technology license agreement expenses.
R&D expenses decreased $5.3 million or 10.7% to $44.4 million during the quarter ended March 30, 2012 from $49.7 million during the quarter ended April 1, 2011. We reduced our R&D spending primarily through reduced incentive accruals and cost reduction initiatives to optimize and integrate acquired organizations.
19
Selling, General and Administrative (“SG&A”)
SG&A expenses consist primarily of salaries and expenses of employees engaged in selling and marketing our products as well as the salaries and expenses required to perform our human resources, finance, information systems, legal, executive and other administrative functions.
SG&A costs decreased by $0.8 million or 2.2% to $34.2 million during the quarter ended March 30, 2012 from $35.0 million during the quarter ended April 1, 2011. The decrease was driven primarily by reduced sales commissions, compensation expense and incentives as we implemented cost saving initiatives and reduced incentive accruals, offset by a slight increase in legal and other professional fees.
Amortization of Purchased Intangible Assets
Amortization of purchased intangible assets increased $0.3 million or 5.0% to $7.2 million in the quarter ended March 30, 2012 from $6.9 million in the quarter ended April 1, 2011. The increase related to additional amortization on in-process research and development projects acquired from Techwell, Inc. and completed during the quarter ended March 30, 2012.
Restructuring
Restructuring costs were $1.5 million in the quarter ended March 30, 2012 and $2.3 million in the quarter ended April 1, 2011. The restructurings were part of our ongoing efforts to optimize operations and conclude the integrations of acquired organizations.
Other Income and Expenses
Interest Income
Interest income decreased to $0.2 million during the quarter ended March 30, 2012 from $0.8 million during the quarter ended April 1, 2011. The decrease was due primarily to the sale of our remaining auction rate securities in the fourth quarter of 2011.
Interest Expense and Fees
Interest expense and fees decreased to $2.0 million during the quarter ended March 30, 2012 from $4.5 million during the quarter ended April 1, 2011. The decrease was due to the replacement of our previous long-term debt agreement with a new revolving loan facility with a lower interest rate and repayments of our debt.
Gain on Deferred Compensation Investments, Net
We have a liability for a non-qualified deferred compensation plan. We maintain a portfolio of approximately $11.6 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 or loss on deferred compensation investments and changes in the fair value of the liability are recorded as a component of compensation expense. In general, the compensation expense or benefit is substantially offset by the gains and losses on the investment. During the quarter ended March 30, 2012, we recorded a gain of $0.7 million on deferred compensation investments and an increase in compensation expense of $0.8 million.
Income Tax (Benefit) Expense
We recorded a minimal income tax benefit for the quarter ended March 30, 2012 compared with $3.2 million of tax expense or 18.3% of income before taxes for the quarter ended April 1, 2011. The quarter ended March 30, 2012 included a $1.2 million income tax benefit offset by a discrete tax charge related to interest on unrecognized tax benefits of $1.2 million. The effective tax rate for the quarter ended March 30, 2012 excludes the benefit of the research and development tax credit, which expired in 2011.
20
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 may not be cancelled or rescheduled thirty days prior to the most current customer request date (“CRD”) for standard products and ninety days prior to the CRD for semi-custom and custom products. Backlog is influenced by several factors, including end market demand, pricing and customer order patterns in reaction to product lead times. Additionally, we believe backlog can decline 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 production and delivery times increase and some customers may increase orders in excess of their current consumption to reduce their own risk of production disruptions.
Our six-month backlog was $142.5 million as of March 30, 2012 compared to $134.8 million as of December 30, 2011 and $178.2 million as of April 1, 2011. Although not always the case, we believe backlog can be an indicator of performance in the near future.
Business Outlook
In our first quarter 2012 earnings release, furnished as an exhibit to the Form 8-K we filed with the Securities and Exchange Commission (“SEC”) on April 25, 2012, we announced anticipated revenues for the second quarter of 2012 to be in the range of $162 million to $170 million. Based on this outlook, we stated that we expect second quarter 2012 earnings per diluted share to be between $(0.02) and $0.01.
Contractual Obligations and Off-Balance Sheet Arrangements
Our contractual obligations and off-balance sheet arrangements have not changed significantly from December 30, 2011. As of March 30, 2012, we had $21.8 million of open purchase orders for inventory from suppliers.
Liquidity and Capital Resources
Our capital requirements depend on a variety of factors, including but not limited to, the rate of increase or decrease in our existing business base; the success, timing and amount of investment required to bring new products to market; revenue growth or decline; and potential acquisitions. We believe that we have the financial resources necessary to meet business requirements for the next 12 months, including our dividend program, the requisite capital expenditures for the maintenance of worldwide manufacturing capacity, working capital requirements and potential future acquisitions or strategic investments. As of March 30, 2012, our total shareholders’ equity was $1,066.9 million and we had $389.7 million in cash and cash equivalents. We had $4.8 million in long-term investments, primarily bank time deposits, as of March 30, 2012. In addition, as of March 30, 2012, we had $175.0 million in long-term debt outstanding (see Note 8 in the accompanying consolidated financial statements).
As of March 30, 2012, approximately $317.7 million of our cash and cash equivalents, short-term investments and long-term investments was held by our foreign subsidiaries. This amount would be subject to federal and state taxation at approximately 37.5% upon repatriation, net of any foreign tax credits that might be available. We currently do not intend nor foresee a need to repatriate these funds. As of March 30, 2012, all of our long-term investments were held by our foreign subsidiaries and were all denominated in U.S. dollars.
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We expect existing domestic cash and cash equivalents and cash flows from operations to continue to be sufficient to fund our domestic operating activities and cash commitments for investing and financing activities, such as regular quarterly dividends, debt repayment schedules, and material capital expenditures, for at least the next 12 months and thereafter for the foreseeable future. In addition, we expect existing foreign cash and cash equivalents, short-term investments, and cash flows from operations to continue to be sufficient to fund our foreign operating activities and cash commitments for investing activities, such as material capital expenditures, for at least the next 12 months and thereafter for the foreseeable future.
Our primary sources and uses of cash during the quarters ended March 30, 2012 and April 1, 2011 were as follows (in millions):
| | | | | | | | |
| | Quarter ended | |
| | March 30, 2012 | | | April 1, 2011 | |
Sources of Cash | | | | | | | | |
Existing business performance and activities | | | | | | | | |
Operating activities, including working capital changes | | $ | 21.9 | | | $ | 31.0 | |
Cash flow from exercise of stock options and purchases under the employee stock purchase plan, including tax benefits and payments on vesting of awards | | | (0.6 | ) | | | 2.6 | |
| | | | | | | | |
| | | 21.3 | | | | 33.6 | |
| | | | | | | | |
Uses of Cash | | | | | | | | |
Capital expenditures, net of sale proceeds | | | (1.5 | ) | | | (1.7 | ) |
Repayments of debt | | | (25.0 | ) | | | (20.3 | ) |
Dividends paid | | | (15.4 | ) | | | (15.2 | ) |
Cash/Investment Management Activities | | | | | | | | |
Decrease in investments and foreign exchange effects | | | 26.6 | | | | 10.9 | |
| | | | | | | | |
Net increase in cash and cash equivalents | | $ | 6.0 | | | $ | 7.3 | |
| | | | | | | | |
For the quarter ended March 30, 2012, our operational cash flows were $21.9 million compared to $31.0 million in the quarter ended April 1, 2011. This decrease of $9.1 million was primarily due to lower operating income and changes in working capital. We repaid $25.0 million of our long-term debt. We used approximately $1.5 million for capital expenditures and $15.4 million to pay shareholder dividends. Investment balances decreased by $26.6 million in the quarter ended March 30, 2012, primarily due to the maturity of short term investments. The resulting increase in cash was $6.0 million overall.
We strive to continually improve the cash flows from our existing business activities and return a substantial portion of that cash flow to shareholders. We continue to maintain and improve our existing business performance with necessary capital expenditures and acquisitions that may further improve our business and return on investment. Cash, stock, debt or a combination thereof may be issued to fund additional acquisitions to grow our business.
Our cash, cash equivalents and investments give us the flexibility to return free cash flow to our shareholders in the form of dividends, while also pursuing business improvement opportunities for our future.
Non-cash Working Capital
Trade accounts receivable, less valuation allowances, decreased by $4.9 million or 7.6% to $60.0 million as of March 30, 2012 from $64.9 million as of December 30, 2011. This decrease primarily reflects the decrease in sales and increased reserves related to changes in distributor agreements.
Our net inventories decreased by $7.7 million or 7.9% to $90.2 million as of March 30, 2012 from $97.9 million as of December 30, 2011. Inventories decreased from year end as a result of decreased production. While we maintain stock of certain high volume products to ensure our lead times remain within customer expectations, we lowered overall inventory balances in response to decreased backlog and sales volumes.
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Capital Expenditures
Capital expenditures, net of sales proceeds, were $1.5 million for the quarter ended March 30, 2012 and $1.7 million for the quarter ended April 1, 2011. Capital expenditures have been focused primarily on the expansion of test capacity to support continuing unit volume growth, electronic equipment mostly for R&D, and IT related equipment. We anticipate capital expenditures will remain at current levels in the near term.
Cash flow from exercises and vesting of stock awards and our Employee Stock Purchase Plan (“ESPP”)
Cash flow from stock plans (including exercises of stock options (“Options”), tax payments on vesting restricted and deferred stock awards (“Awards”) and sales under our ESPP) was a net payment of $0.6 million in the quarter ended March 30, 2012, compared to $2.6 million received in the quarter ended April 1, 2011. The quarter ended April 1, 2011 included our semi-annual sale of ESPP stock. The first semi-annual sale of ESPP stock will occur in the second quarter of 2012.
We have changed the mix of new share-based incentive grants to a larger proportion of Awards than Options. Awards do not yield cash proceeds from an exercise event as do Options, but may result in tax payments on shares withheld. Additionally, exercises are decisions of grantees and are influenced by the level of our stock price and by other considerations of grantees. The recent decline in stock price has resulted in many of our options being “underwater” with exercise prices in excess of the current stock price. While the level of cash inflow from stock plans is difficult to forecast or control, we believe it will remain a secondary source of cash.
Dividends on Common Stock
In February 2012, our Board of Directors declared a quarterly dividend of $0.12 per share of common stock. The dividend was paid on February 24, 2012 to shareholders of record as of the close of business on February 14, 2012. In April 2012, our Board of Directors also declared a dividend of $0.12 per share, to be paid on May 25, 2012 to shareholders of record as of the close of business on May 15, 2012.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk. |
Global economic conditions pose a risk to the overall economy as consumers and businesses may defer purchases in response to the uncertainty around tighter credit and negative financial news. These conditions could reduce product demand and affect other related matters. Demand could be different from our expectations due to many factors including changes in business and economic conditions, conditions in the credit market that could affect consumer confidence, customer acceptance of our products, changes in customer order patterns including order cancellations and changes in the level of inventory held by vendors.
Credit markets have tightened as a result of the recent financial crises, resulting in lower liquidity in many financial markets and excess volatility in fixed income, credit and equity markets. We have experienced a number of resulting effects, including product delays due to effects experienced by key suppliers; reduced orders and payments as customers are affected by tighter credit markets and/or insolvency; decreased investing and financing options in a tighter market; increased expenses; increased impairments resulting from lower orders and sales as customers experience difficulties obtaining financing; and volatility and extreme changes in the earnings and fair value of our investments.
Moreover, in the normal course of doing business, we are exposed to the risks associated with foreign currency exchange rates and changes in interest rates. We employ established policies and procedures governing the use of financial instruments, entered into for purposes other than trading purposes, to manage our exposure to these risks.
Our cash equivalents and investments are subject to three market risks: interest rate risk, credit risk and liquidity risk. Our investments are primarily held in money market funds and bank time deposits.
For further discussion of the risk related to foreign currency exchange rates and market risk, see our 2011 Annual Report on Form 10-K filed with the SEC on February 24, 2012.
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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 March 30, 2012. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our officers concluded that, as of March 30, 2012, our disclosure controls and procedures were (1) designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to our CEO and CFO by others within those entities, particularly during the period in which this report was being prepared and (2) effective to ensure that all material information required to be disclosed by Intersil in the reports that it files or furnishes under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that all such material information is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosures.
(b)Changes in Internal Controls.No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) occurred during the fiscal quarter ended March 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II-OTHER INFORMATION
Item 1. | Legal Proceedings. |
There were no material legal proceedings filed against Intersil during the quarter ended March 30, 2012, nor were there any material developments in existing legal proceedings to which Intersil is a party. Please reference our 2011 Annual Report on Form 10-K filed with the SEC on February 24, 2012 for a discussion of the material legal proceedings to which we are a party.
In addition to the cautionary information included in this report, you should carefully consider the factors discussed in “Item 1A. Risk Factors” in our 2011 Annual Report on Form 10-K, filed with the SEC on February 24, 2012, 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. | Mine Safety Disclosures. |
Not applicable.
Item 5. | Other Information. |
None.
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| | |
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). |
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3.2 | | Amended and Restated Bylaws of Intersil Corporation (incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-K, filed February 24, 2012). |
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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). |
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10 | | Credit Agreement dated September 1, 2011, by and among Intersil, the Lenders (as defined therein), Bank of America, N.A. as administrative agent, swing line lender and letter of credit issuer (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed September 8, 2011). |
| |
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.* |
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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.* |
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32 | | Certifications 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.* |
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101.INS | | XBRL Instance document* |
| |
101.SCH | | XBRL Taxonomy Extension Schema* |
| |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase* |
| |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase* |
| |
101.LAB | | XBRL Taxonomy Extension Label Linkbase* |
| |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase* |
* | Filed or furnished herewith. |
Attached as Exhibit 101 to this report are the following, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) Unaudited Condensed Consolidated Statements of Operations, (ii) Unaudited Condensed Consolidated Balance Sheets, (iii) Unaudited Condensed Consolidated Statements of Cash Flows, (iv) Unaudited Condensed Consolidated Statements of Comprehensive (Loss) Income, and (v) Notes to Unaudited Condensed Consolidated Financial Statements.
In accordance with Rule 406T of Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act, is deemed not filed for purposes of Section 18 of the Exchange Act, and otherwise is not subject to liability under these sections.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
INTERSIL CORPORATION |
(Registrant) |
|
/s/ Jonathan A. Kennedy |
Jonathan A. Kennedy |
Chief Financial Officer |
Date: May 3, 2012
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