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 October 3, 2014

OR

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

For the transition period from              to             

Commission File Number: 000-29617

INTERSIL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).        ☐ Yes               ☒ No

The number of shares outstanding of the issuer’s classes of common stock as of the close of business on October 31, 2014:

 

 

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INTERSIL CORPORATION

INDEX

 

 

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PART I-FINANCIAL INFORMATION

Item 1.Financial Statements.

 

INTERSIL CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

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INTERSIL CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

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INTERSIL CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

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INTERSIL CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 

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INTERSIL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1—Basis of Presentation

 

Intersil Corporation (“Intersil,” which may also be referred to as “we,” “us” or “our”) is a leading provider of innovative power management and precision analog solutions. Our products address some of the largest markets within the industrial and infrastructure, personal computing and high-end consumer 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 January 3, 2014 condensed 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 3, 2014.

 

We utilize a 52/53 week fiscal year, ending on the nearest Friday to December 31. Fiscal year 2013 was a 53 week period with an extra week included in our second quarter. The next 53 week period will be in the second quarter of our fiscal year 2018. Quarterly or annual periods vary from exact calendar quarters or years.

 

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

Recent Accounting Guidance Not Yet Adopted

On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for Intersil on December 31, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

 

Note 2 — Fair Value Measurements

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

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

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

 

 

There were no transfers into or out of Level 1 or Level 2 financial assets during the quarters ended October 3, 2014 and October 4, 2013.

 

Note 3 — Inventories

 

Inventories are summarized below (in thousands):

 

 

 

 

Note 4 — Goodwill and Purchased Intangibles

Goodwill — We perform our annual test of impairment in our fourth quarter or if indicators of impairment exist, in interim periods. Factors that could trigger a goodwill impairment review include adverse legal factors, adverse changes in our business climate, unanticipated competition, regulatory issues, loss of key personnel, significant changes or losses in business operations, weakness in our industry, downward revisions to forecasts for future periods, restructuring plans and declines in market capitalization below equity book value. There was no change in the carrying value of goodwill during the quarter ended October 3, 2014.

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

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

 

 

 

 

Note 5 — Restructuring and Related Costs

 

Our restructuring plans have been described in prior period filings. During the quarter ended October 3, 2014 no new restructuring plans were initiated.

The restructuring and related costs balance as of the period ended October 3, 2014 primarily relates to the July 2013 plan. The amounts below relating to the restructuring are included in other accrued expenses and liabilities on our unaudited condensed consolidated balance sheets (in thousands): 

 

 

 

Note 6 — Income Taxes

 

 

During the quarter ended April 4, 2014, we adopted Accounting Standards Update (ASU) No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists ("ASU 2013-11"). ASU 2013-11 clarifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. Adoption of this standard resulted in a $23.5 million decrease to our deferred tax assets and income tax payable during the quarter ended April 4, 2014.

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

The increases related to prior year tax positions were primarily due to accrued interest on the UTBs.

During the quarter ended October 3, 2014, we reached final settlement with Swiss tax authorities in connection with an examination of years 2009-2012.  We decreased our UTBs in the amount of $7.5 million.  This reduction included a $2.7 million cash payment consisting of $2.4 million of additional tax and $0.3 million of interest and a $4.8 million decrease in deferred tax assets related to utilization of a  net operating loss attribute.

During the quarter ended October 3, 2014, we made cash payments of $0.3 million to various states related to the 2008 – 2009 IRS settlement.  During the quarter ended July 4, 2014, we made cash payments of $0.5 million to various states related to the 2005-2007 IRS settlement.

 

Within the next 12 months, we estimate that our UTB balance may be reduced by $0.1 million for interest related to the state tax impact of the settlement with the IRS for tax years 2005 – 2007 and $0.3 million for interest related to the state tax impact of the settlement with the IRS for tax years 2008 – 2009.

 

Hypothetical Additional Paid in Capital (“APIC”) Pool—The hypothetical APIC pool represents the excess tax benefits related to equity-based compensation that are available to absorb future tax deficiencies.  If the amount of tax deficiencies is greater than the available hypothetical APIC pool, we record the excess as income tax expense in our unaudited condensed consolidated statements of income. During the quarter and three quarters ended October 3, 2014, we recognized $0.3 million and $1.3 million, respectively, of income tax expense resulting from tax deficiencies related to equity-based compensation in our unaudited condensed consolidated statements of operations. During the quarter and three quarters ended October 4, 2013, we recognized $0.9 million and $3.0 million, respectively, of income tax expense resulting from tax deficiencies related to equity-based compensation in our unaudited condensed consolidated statements of operations. 

 

 

Note 7 — Long-Term Debt

 

We have a five-year, $325.0 million revolving credit facility (the “Facility”) that matures on September 1, 2016 and is payable in full upon maturity. Under the Facility, $25.0 million is available for the issuance of standby letters of credit, $10.0 million is available as swing line loans and $50.0 million is available for multicurrency borrowings. Amounts repaid under the Facility may be reborrowed. We did not have any outstanding borrowings against the Facility as of October 3, 2014 or October 4, 2013.  

 

Standby Letters of Credit — We issue standby letters of credit during the ordinary course of business through major financial institutions as required for certain regulatory matters. We had outstanding letters of credit totaling $1.4 million as of October 3, 2014 and January 3, 2014. The standby letters of credit are secured by pledged deposits. 

 

Note 8 — Common Stock and Dividends

 

Dividends —On July 28, 2014, our Board of Directors declared a dividend of $0.12 per share of common stock resulting in paid dividends of $15.6 million on August 29, 2014, to shareholders of record as of the close of business on August 19, 2014.  On October 24, 2014, our Board of Directors declared a dividend of $0.12 per share of common stock to be paid on November 28, 2014, to shareholders of record as of the close of business on November 18, 2014. 

 

Class A Common Stock — Share activity for Class A common stock since January 3, 2014 (in thousands):

 

 

 

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Note 9 — Equity-based Compensation

 

 

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

 

Equity-based Compensation Summary — The following table presents information about Options and Awards as of October 3, 2014 and activity for the three quarters ended:

 

 

(1)  Awards exercised are those that have reached full vested status and have been delivered to the recipients as a taxable event due to elective deferral, available in the case of deferred stock units. Deferred stock units for which the deferral is elected timely are vested but still outstanding as Awards. Total un-issued shares related to deferred stock units as of October 3, 2014 were 66,670 shares as shown in the Awards column as Exercisable/vested.

 

 

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

 

 

 

Market and Performance-based Grants — As of October 3, 2014, we had Options and Awards outstanding that include the usual service conditions as well as (1) market conditions related to total shareholder return and (2) performance conditions relating to revenue and operating income relative to peer companies. Under the terms of the agreements, participants may receive from 0 - 200% of the original grant. Equity-based compensation cost is measured at the grant date, based on the fair value of the number of shares ultimately expected to vest, and is recognized as an expense, on a straight line basis, over the requisite service period (shares in thousands):

 

 

 

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Note 10 —Earnings Per Share

 

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

 

 

 

 

Note 11 — Segment Information

 

We report our results in one reportable segment. We design and develop innovative power management and precision analog integrated circuits (“ICs”). Our chief executive officer is our chief operating decision maker.

 

Note 12 — Legal Matters and Indemnifications

 

Legal Matters — There were no material legal proceedings filed against Intersil during the quarter ended October 3, 2014, nor were there any material developments in the TAOS litigation except that the trial has been rescheduled for February 2015.  

   

Please reference our 2013 Annual Report on Form 10-K filed with the SEC on February 18, 2014 for additional background details.

 

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.

 

 

 

—End of Unaudited Condensed Consolidated Financial Statements—

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

 

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

 

Forward Looking Statements

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

 

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

 

Overview

 

We design and develop innovative power management and precision analog integrated circuits (ICs). We were formed in August 1999 when we acquired the semiconductor business of Harris Corporation and began operating as Intersil Corporation.  That semiconductor business included product portfolios and intellectual property dating back to 1967 when

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semiconductor companies were just emerging in Silicon Valley. We are now an established supplier of power management and precision analog technology for many of the most rigorous applications in the computing, consumer and industrial markets. We supply a full range of power IC solutions including battery management, computing power, display power, regulators and controllers and power modules; as well as precision analog components such as amplifiers and buffers, proximity and light sensors, data converters, optoelectronics and interface products.  As a major supplier to the military and aerospace industries, our product development methodologies reflect experience designing products to meet the highest standards for reliability and performance in challenging environments.

 

Critical Accounting Policies

 

There have been no significant changes to our critical accounting policies during the quarter ended October 3, 2014 as compared to the previous disclosures in the 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 3, 2014.

 

Recent Accounting Guidance Not Yet Adopted

On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for Intersil on December 31, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are is evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

Results of Operations

 

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

 

 

 

Fiscal year 2013 was a 53 week period with an extra week included in our second quarter ended July 5, 2013.

 

 

 

 

 

 

 

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Revenue and Gross Margin

 

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

 

 

 

 

 

 

 

 

Revenue decreased $9.0 million or 5.9% to $143.6 million during the quarter ended October 3, 2014 from $152.6 million during the quarter ended October 4, 2013.The decrease in revenue took place primarily in the consumer end market which decreased 42.3% compared to the quarter ended October 4, 2013.  Revenue from the industrial & infrastructure market and personal computing market increased 3.8% and 11.2%, respectively. Revenue from the consumer market decreased in the quarter ended October 3, 2014 as we reduced our focus on low-margin consumer products and we also benefited from a major ramp in gaming consoles during the quarter ended October 4, 2013 which did not repeat in the current period.

 

Revenue from the industrial & infrastructure market and computing markets increased 8.3% and 3.7%, respectively, in the three quarters ended October 3, 2014 compared to the same period last year.  Revenue from the consumer market declined 24.7%. Fiscal year 2013 was a 53 week period and the three quarters ended October 4, 2013 included an extra week.  The increase in the industrial & infrastructure market during the three quarters ended October 4, 2013 was broad-based with marked strength in automotive and aerospace products. Revenue from the consumer market decreased in the three quarters ended October 4, 2014 as we benefited from a major ramp in gaming consoles during the three quarters ended October 4, 2013 which did not repeat in the current period.

 

In aggregate, higher overall unit sales in the quarter ended October 3, 2014 as compared to the quarter ended October 4, 2013, increased revenue by $0.7 million.  In the quarter ended October 3, 2014 as compared to the quarter ended October 4, 2013,  the impact of change in average selling prices (“ASPs”) and product mix was a decrease in revenue by $9.8 million. Higher overall unit sales in the three quarters ended October 3, 2014 as compared to the three quarters ended October 4, 2013, increased revenue by $0.3 million. In the three quarters ended October 3, 2013 as compared to the three quarters ended October 4, 2013, a change in ASPs and the product mix increased revenue by $1.9 million.

 

The three quarters ended October 4, 2013 included an extra week. 

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Geographical revenue ($ in thousands and % of revenue):

 

 

 

 

Two distributors that support a wide range of customers around the world accounted for 17.0% and 10.8% of our revenue in the quarter ended October 3, 2014, compared to 17.4% and 10.4% of revenue during the quarter ended October 4, 2013. Two original design manufacturers accounted for 8.1% and 4.4% of our revenue for the quarter ended October 3, 2014, compared to 8.7% and 5.6% of revenue during the quarter ended October 4, 2013.

 

Two distributors that support a wide range of customers around the world accounted for 17.9% and 12.2% of our revenue in the three quarters ended October 3, 2014, compared to 17.4% and 11.5% of revenue during the three quarters ended October 4, 2013. Two original design manufacturers accounted for 7.3% and 4.0% of our revenue for the three quarters ended October 3, 2014, compared to 7.4% and 6.1% of revenue during the three quarters ended October 4, 2013.

 

Cost of Revenue and Gross Margin

 

Cost of revenue consists primarily of purchased materials and services, labor, overhead and depreciation associated with manufacturing pertaining to products sold. As a percentage of sales, gross margin was 58.4% during the quarter ended October 3, 2014 compared to 55.4% during the quarter ended October 4, 2013. The increase in gross margin was primarily due to a change in the mix of products sold.  The sale of previously reserved inventory has not had a material impact on our gross margin in the current quarter.

 

As a percentage of sales, gross margin was 57.6% during the three quarters ended October 3, 2014 compared to 54.9% during the three quarters ended October 4, 2013.  The increase in gross margin was primarily due to a change in the mix of products sold.

 

 Operating Costs and Expenses

 

Research and Development (“R&D”)

 

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

 

R&D expenses decreased $0.1 million or 0.4% to $31.2 million during the quarter ended October 3, 2014 from $31.3 million during the quarter ended October 4, 2013.

 

 

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R&D expenses decreased $7.6 million or 7.4% to $95.5 million during the three quarters ended October 3, 2014 from $103.1 million during the three quarters ended October 4, 2013, primarily as a result of lower headcount and other cost reductions from our restructuring actions undertaken in fiscal 2013.

 

Fiscal year 2013 was a 53 week period and the three quarters ended October 4, 2013 included an extra week. 

 

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

 

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

 

SG&A expenses decreased $1.8 million or 6.8% to $25.2 million during the quarter ended October 3, 2014 from $27.1 million during the quarter ended October 4, 2013. The decrease was primarily a result of lower headcount and other cost reductions from our restructuring actions undertaken in fiscal 2013. 

 

SG&A expenses decreased $11.3 million or 13.1% to $75.1 million during the three quarters ended October 3, 2014 from $86.4 million during the three quarters ended October 4, 2013.The decrease was primarily a result of lower headcount and other cost reductions from our restructuring actions undertaken in fiscal 2013.

 

 Fiscal year 2013 was a 53 week period and the three quarters ended October 4, 2013 included an extra week. 

 

Amortization of Purchased Intangibles

 

Amortization of purchased intangibles decreased $0.5 million or 8.5% to $5.6 million during the quarter ended October 3, 2014 from $6.1 million during the quarter ended October 4, 2013. Amortization of purchased intangibles decreased $2.3 million or 12.3% to $16.7 million during the three quarters ended October 3, 2014 from $19 million during the three quarters ended October 4, 2013. The decreases were due to certain intangibles that became fully amortized during fiscal 2013 and the write-off of certain intangible assets to restructuring and related cost during the second quarter of fiscal 2013.

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Provision for Export Compliance Settlement

We recorded a provision of $4.0 million during the quarter ended April 4, 2014 and $6.0 million in the quarter ended October 4, 2013, related to settlement of claims of alleged violations of the ITAR by Directorate of Defense Trade Controls (“DDTC”).  

Restructuring and Related Costs

 

Restructuring and related costs were $9.1 million and $28.6 million during the quarter and three quarters ended October 4, 2013, respectively. The 2013 restructuring charges consisted primarily of severance costs and lease exit costs and were part of efforts to better align our operating expenses with strategic growth areas for the purpose of improving competitiveness and execution across our business, realign our internal fabrication operations with existing requirements, prioritize our sales and development efforts, strengthen financial performance and improve cash flow.

 

Other Income and Expenses

 

Interest Expense and Fees, net

 

Interest expense, fees and other expenses was $0.6 million and $0.4 million during the quarter ended October 3, 2014 and October 4, 2013 respectively. Interest expense, fees and other expenses decreased to $1.4 million during the three quarters ended October 3, 2014 from $1.5 million during the three quarters ended October 4, 2013.

 

Gain on Investments, net

 

We have a liability for a non-qualified deferred compensation plan. We maintain a portfolio of $10.8 million in mutual fund investments and corporate owned life insurance under the plan. Changes in the fair value of the plan asset(s) are recorded as a gain or loss on deferred compensation investments and changes in the fair value of the liability are recorded as a component of compensation expense. In general, the compensation expense or benefit is substantially offset by the gains and losses on the investment.  During the quarter ended October 3, 2014 we recorded a loss of $0.3 million on deferred compensation investments and a decrease in compensation expense of $0.3 million.  During the three quarters ended October 3, 2014, we recorded a gain of $0.3 million on deferred compensation investments and an increase in compensation expense of $0.5 million.

 

During the three quarters ended October 3, 2014, we recorded a gain of $0.5 million on the recovery of previously recognized losses on auction rate securities compared to a gain of $0.9 million for the three quarters ended October 4, 2013.    

 

Income Tax Expense (Benefit) 

   

Our income tax expense was $7.3 million for the quarter ended October 3, 2014 compared to an income tax expense of $13.7 million for the quarter ended October 4, 2013. The income tax expense for the quarter ended October 3, 2014 includes a discrete tax expense of $0.8 million from tax deficiencies in equity-based compensation and interest on the UTBs. For the quarter ended October 4, 2013, we included a discrete tax expense of $1.3 million related to tax deficiencies in equity-based compensation and interest on the UTBs.  Excluding discrete items the effective tax rate was 32.2% for the quarter ended October 3, 2014 compared to 107.3% for the quarter ended October 4, 2013.  The effective tax rate differs from the 35% statutory corporate tax rate primary due to income in foreign jurisdictions with lower statutory tax rates.

 

Our income tax expense was $19.1 million for the three quarters ended October 3, 2014, compared to an income tax benefit of $2.7 million for the three quarters ended October 4, 2013.  The three quarters ended October 3, 2014 includes a discrete tax expense of $1.3 million from tax deficiencies related to equity-based compensation.  The three quarters ended October 4, 2013 includes a discrete tax benefit of $5.7 million relating to the 2012 federal R&D tax credit which was retroactively reinstated on January 2, 2013 with the enactment of the American Taxpayer Relief ACT of 2012 as well as a discrete tax expense of $3.0 million from tax deficiencies related to equity-based compensation. Excluding these items, the effective tax rate was 31.1% for the three quarters ended October 3, 2014 compared to 81.8% for the three quarters ended October 4, 2013.  The decrease was due to the impact of income in foreign jurisdictions being taxed at rates different than the United States statutory rate.

 

As a global company, our effective tax rate is highly dependent upon the geographic composition of worldwide earnings and tax regulations. We are subject to income taxes in the United States and many foreign jurisdictions and significant judgment is required to determine worldwide tax liabilities. Our effective tax rate, as well as our actual taxes payable, could be

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adversely affected by changes in the mix of earnings between countries with differing tax rates. Our primary foreign operations are in Malaysia where we currently have a tax holiday resulting in a tax rate of 0%. This tax holiday began on July 1, 2009 and terminates on July 1, 2019. In order to retain this holiday in Malaysia, we must meet certain operating conditions, including compliance with warehouse and shipping quotas and specified manufacturing activities in Malaysia. Absent such tax incentives, the corporate income tax rate in Malaysia that would otherwise apply to us would be 25%. If we cannot or elect not to comply with these conditions, we could lose the related tax benefits. In such event, we may be required to modify our operational structure and tax strategy. Any such modified structure or strategy may not be as beneficial as the benefits provided under the present tax concession arrangement.

   

The impact of income earned in foreign jurisdictions being taxed at rates different than the United States federal statutory rate was a benefit of $2.0 million and a related effective tax rate impact of 9.3% for the quarter ended October 3, 2014, compared to an expense of $4.6 million and a related effective tax rate impact of 39.8% for the quarter ended October 4, 2013.

 

The impact of income earned in foreign jurisdictions being taxed at rates different than the United States federal statutory rate was a benefit of $5.7 million and a related effective tax rate impact of 9.3% for the three quarters ended October 3, 2014 compared to a benefit of $0.6 million and a related effective tax rate benefit of 39.8% for the three quarters ended October 4, 2013.

   

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

   

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

 

Business Outlook 

   

In our third quarter fiscal 2014 earnings release, furnished as an exhibit to the Form 8-K we filed with the Securities and Exchange Commission (“SEC”) on October 29, 2014, we announced anticipated revenue for the third quarter of fiscal 2014 to be in the range of $125 million to $132 million. Based on this outlook, we stated that we expect fourth quarter 2014 earnings per diluted share to be $0.06 to $0.08 per share.

 

Contractual Obligations and Off-Balance Sheet Arrangements

 

As of October 3, 2014, we had $21.8 million of open purchase orders for inventory from suppliers. We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

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 cash flows from operations together with our cash and investment balances and available credit facility will provide the financial resources necessary to meet business requirements for the next 12 months for both our domestic and foreign operations. These requirements include our dividend program, the requisite capital expenditures for the maintenance of worldwide manufacturing capacity, working capital requirements and potential acquisitions or strategic investments  As of October 3, 2014, our total shareholders’ equity was $975.2 million and we had $210.6 million in cash and cash equivalents. 

 

As of October 3, 2014, $157.5 million of our cash and cash equivalents was held by our foreign subsidiaries. We have provided for federal and state taxation at 37.5% in connection with the Revenue Procedure 99-32 election related to the 2008-2009 IRS examination periods which allows for repatriation of $125.0 million. During fiscal 2013, we repatriated $12.5 million of this amount. Therefore, $112.5 million of our cash and cash equivalents held by our foreign subsidiaries as of October 3, 2014 would not be subject to further federal taxation upon repatriation to the United States.

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As of October 3, 2014, we have $325.0 million of borrowing capacity under our five-year revolving credit facility (the “Facility”). The Facility matures on September 1, 2016 and is payable in full upon maturity. Under the Facility, $25.0 million is available for the issuance of standby letters of credit, $10.0 million is available as swing line loans and $50.0 million is available for multicurrency borrowings. Amounts repaid under the Facility may be re-borrowed. The Facility currently bears interest at 1.75% over one-month London Interbank Offered Rate (“LIBOR”) but is variable based on our leverage ratio as described in the credit agreement governing the Facility. As of October 3, 2014, we were in compliance with all applicable covenants of the above mentioned credit agreement.

 

 

Operating Activities

 

Cash provided by operating activities consists of net income adjusted for certain non-cash items and changes in certain assets and liabilities.

For the three quarters ended October 3, 2014, our cash flows from operations were $55.1 million compared to cash flows of $60.4 million in the three quarters ended October 4, 2013.    Trade accounts receivable, less valuation allowances, increased by $9.2 million to $58.7 million as of October 3, 2014, an increase of 18.6% from January 3, 2014 primarily due to non-linearity of revenue.

 

Investing activities

Investing cash flows consist primarily of capital expenditures and net investment purchases and maturities.

Net cash used in investing activities was $5.5 million during the three quarters ended October 3, 2014 compared to net cash used in investing activities of $10.2 million during the three quarters ended October 4, 2013.

 

Capital expenditures, net of sale proceeds, were $6.0 million for the three quarters ended October 3, 2014 and $15.8 million for the three quarters ended October 4, 2013. We expect fourth quarter capital expenditures to be $4.0 million to $6.0 million. 

 

Financing activities

Financing cash flows consist primarily of payment of dividends to stockholders, proceeds from issuance of stock under our employee stock purchase plan and exercise of employee stock options.

Cash flows from stock plans (including exercises of stock options (“Options”), tax payments on vesting of restricted and deferred stock awards (“Awards”) and under our employee stock purchase plan) were $15.1 million in the three quarters ended October 3, 2014 compared to $4.3 million in the three quarters ended October 4, 2013. The increase was mainly attributable to exercise of stock options.

 

Dividends on Common Stock

 

On July 28, 2014, our Board of Directors declared a dividend of $0.12 per share of common stock resulting in paid dividends of $15.6 million on August 29, 2014, to shareholders of record as of the close of business on August 19, 2014.  On October 24, 2014, our Board of Directors declared a dividend of $0.12 per share of common stock to be paid on November 28, 2014, to shareholders of record as of the close of business on November 18, 2014.

 

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Item 3.Quantitative and Qualitative Disclosures about Market Risk.

 

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

 

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 2013 Annual Report on Form 10-K filed with the SEC on February 18, 2014.

 

Item 4.Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of October 3, 2014. 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 October 3, 2014, our disclosure controls and procedures were (1) designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to our CEO and CFO by others within those entities, particularly during the period in which this report was being prepared and (2) effective to ensure that all material information required to be disclosed by Intersil in the reports that it files or furnishes under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that all such material information is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosures.

(b) Changes in Internal Controls. No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended October 3, 2014, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II-OTHER INFORMATION

 

Item 1.Legal Proceedings.

 

Please see Note 12 to our unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q for further discussion.

 

 

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 2013 Annual Report on Form 10-K, filed with the SEC on February 18, 2014, 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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Item 6.Exhibits.

 

 

*Filed or furnished herewith.

 

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

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SIGNATURES

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

 

 

Date: November 6, 2014

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