UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q







OR





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 April 20, 2016:





 

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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 semiconductor solutions. Our products address some of the largest markets within the industrial and infrastructure, and consumer and computing end markets.



In our opinion, these 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 1, 2016 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 year ended January 1, 2016.



We utilize a 52/53 week year, ending on the nearest Friday to December 31.  2016 and 2015 were 52-week years. Quarterly or annual periods vary from exact calendar quarters or years.

Recent Accounting Guidance Not Yet Adopted

In January 2016, the Financial Accounting Standards Board, or FASB, issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which provides guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities. This ASU will be effective for us beginning in the first quarter of 2018. We are currently evaluating the impact of the adoption of this ASU on our financial statements.

In February 2016, FASB issued ASU 2016-02, Leases (Topic 842), which supersedes existing guidance on accounting for leases in "Leases (Topic 840)" and generally requires all leases to be recognized in the consolidated balance sheet. ASU 2016-02 is effective for annual and interim reporting periods beginning after December 15, 2018; early adoption is permitted. The provisions of ASU 2016-02 are to be applied using a modified retrospective approach. We are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements.

In March 2016, FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. This ASU affects entities that issue equity-based payment awards to their employees. The ASU is designed to simplify several aspects of accounting for equity-based payment award transactions, which include income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows, and forfeiture rate calculations. ASU 2016-09 will become effective for us beginning in the first quarter of 2017. Early adoption is permitted in any interim or annual period. We are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements.



Note 2 — Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year ending December 30, 2016.

There have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the year ended January 1, 2016 that have had a material impact on our unaudited condensed consolidated financial statements and related notes.

 



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Note 3 — Fair Value Measurements

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.

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





There were no transfers into or out of Level 1, Level 2, or Level 3 financial assets during the quarters ended April 1, 2016 and April 3, 2015.



Note 4 — Inventories



Inventories are summarized below (in thousands):

















Note 5 — 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

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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 were no impairment triggers noted during the quarters ended April 1, 2016 or April 3, 2015, respectively.



Purchased Intangibles —  Our intangible assets consisted of the following (in thousands):









Substantially all of our purchased intangibles consist of multiple elements of developed technology which have estimated useful lives of five to seven years. Other purchased intangibles consist primarily of customer relationships and other identifiable assets, which have an estimated useful life of three to seven years.  No trigger requiring an impairment review was noted during the quarter ended April 1, 2016.



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





















Note 6 — Income Taxes



Our income tax expense was $3.0 million, which equates to an effective tax rate of 20.1%, for the quarter ended April 1, 2016 compared to an income tax expense of $5.5 million, which equated to a negative effective tax rate of 8.74%, for the quarter ended April 3, 2015. 



Our effective tax rate for the quarter ended April 1, 2016 differs from the 35% U.S. federal statutory income tax rate due primarily to income earned in jurisdictions where the tax rate is lower than the United States, principally in Malaysia, state

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income taxes, U.S. research and development tax credits, U.S. domestic production activity and other permanent non-deductible items.  Our effective tax rate was negative for the quarter ended April 3, 2015, primarily due to losses in foreign jurisdictions related to the TAOS litigation.  The $81.1 million accrual recorded for the TAOS litigation was treated as an unusual and discrete item for the quarter, for which the future tax benefit was $1.2 million, and the loss was allocated primarily to our Malaysian operations.  



For the quarter ended April 1, 2016, we have no material changes to our tax years subject to examination by major tax jurisdictions.  Accordingly, we have no material changes to our unrecognized tax benefits and related interest and penalty since the year ended January 1, 2016.  We do not believe that there will be a  significant increase or decrease in unrecognized tax benefits within the next nine months.





Note 7  — Long-Term Debt



We have a five-year, $325.0 million revolving credit facility, or 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 re-borrowed. We did not have any outstanding borrowings against the Facility as of April 1, 2016 or January 1, 2016.  



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 $1.3 million and $1.3 million as of April 1, 2016 and January 1, 2016, respectively. The standby letters of credit are secured by pledged deposits.



Note 8 — Common Stock and Dividends



Class A Common Stock — Share activity for Class A common stock since January 1, 2016 (in thousands):











Dividends — In January 2016, the Board of Directors declared a dividend of $0.12 per share to stockholders of record as of February 16, 2016 paid on February 26, 2016.    During April 2016, our Board of Directors declared a dividend of $0.12 per share of common stock payable on or about May 27, 2016, to stockholders of record as of the close of business on May 17, 2016. 











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 and activity for the quarter ended April 1, 2016:



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(1) Grants include 318,323 MSU Awards issued during the quarter ended April 1, 2016.

(2) Awards exercised are those that have reached full vested status and have been delivered to the recipients as a taxable event due to an elected 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 April 1, 2016 were 67,000 shares as shown in the Awards column as Exercisable/vested.



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):



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Market and Performance-based Grants — As of April 1, 2016, we had Options and Awards outstanding that include the usual service conditions as well as (1) market conditions related to total stockholder 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 - 300% 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:

















Note 10 —Earnings (Loss) Per Share



The following table sets forth the computation of basic and diluted (loss) 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, or ICs. Our chief executive officer is our chief operating decision maker.



Note 12 — Legal Matters and Indemnifications



There were no material changes in our legal matters and indemnifications, as disclosed in our Annual Report on Form 10-K for the year ended January 1, 2016.



TAOS litigation

Texas Advanced Optoelectronic Solutions, Inc., or TAOS, named us as a defendant in a lawsuit filed on November 25, 2008 in the United States District Court for the Eastern District of Texas. In this action, TAOS alleged four claims consisting of patent infringement, breach of contract, trade secret misappropriation, and tortious interference with a business relationship. On March 6, 2015, the jury found in favor of TAOS on each of the four claims and recommended to the court that we pay

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$48.8 million in actual damages and $10.0 million in exemplary damages on the trade secret misappropriation claim along with $74,000 in damages for patent infringement.  The jury’s verdict also included other duplicative damages of $30.0 million.  After the trial, TAOS filed post-trial motions seeking unspecified attorneys’ fees, enhanced patent infringement damages, $18.1 million in pre-judgment interest, which will continue to accrue until the judgment is entered, and a permanent injunction enjoining us from making or selling certain ambient light sensor products. We have vigorously opposed each of these motions.  We filed post-trial motions for a new trial and renewed a motion for judgment as a matter of law.  In January 2016, the court heard oral arguments on TAOS’ motions for a permanent injunction and unspecified attorneys’ fees, but declined to hear oral argument on the other motions before it.  On April 22, 2016, the court denied TAOS’ motion for permanent injunction, but allowed for a continuing reasonable royalty on parts found to be infringing TAOS’ patent.  On April 26, 2016, the court issued its order on the remaining post-trial motions, in relevant part, granting TAOS’ motion for entry of final judgment, consistent with the jury’s verdict, but without the duplicative damages.  The court also indicated it intends to award to TAOS $18.2 million in pre-judgment interest plus court costs.  After judgment is entered, we will file an appeal with the U.S. Court of Appeals for the Federal Circuit.

As a consequence of the verdict, during the quarter ended April 3, 2015, we recorded a provision of $81.1 million related to this matter, including pre-judgment interest and estimated legal costs, but excluding the damages we believe to be duplicative. No change was required to our estimate as a result of the April 26, 2016 order.  Since April 3, 2015, we incurred $3.4 million of legal costs, and, as such, the accrual outstanding as of April 1, 2016 was $77.7 million. Given the unpredictable nature of this type of litigation and because the outcome remains subject to appeal, the ultimate impact of this lawsuit may be materially different from our estimate.



Environmental matter



In a correspondence dated September 28, 2015, Thomson Consumer Electronics Television Taiwan, Ltd., or TCETVT, notified us that it reserved its right to seek indemnification from us for any and all costs, fees, and expenses incurred as a result of a toxic tort class action lawsuit filed in Taiwan against TCETVT and others.  The lawsuit pertains to alleged injuries resulting from groundwater contamination at a manufacturing facility in Taiwan currently owned by TCETVT, which was previously owned and operated by predecessors, including General Electric and Harris Corporation, or Harris, of our Taiwan subsidiary, Intersil Ltd. In the September 28 correspondence, TCETVT also informed us that the Taipei District Court entered a judgment of $18.5 million in the lawsuit against TCETVT, which judgment has been appealed. In addition, TCETVT informed us that they have incurred costs of $11.2 million in defending against the lawsuit through September 1, 2015.  We were also advised by TCETVT that additional claimants made be added to the lawsuit and TCETVT believes that if such additional claimants were successfully added, the resulting liability could be as high as $200.0 million.

 

TCETVT also informed us that it reserved its right to seek indemnification from us for any and all costs associated with the remediation of the contamination on that site and nearby areas. TCETVT claims they have incurred $15.9 million in remediation-related costs through September 1, 2015. 

 

Under the terms of the 1999 Master Transaction Agreement between Harris and Intersil, whereby Harris transferred its semiconductor business assets to us, environmental liabilities (including those associated with Harris’ Taiwan semiconductor operations) were expressly retained by Harris.  The Master Transaction Agreement also requires Harris to indemnify us for any and all costs relating to those retained environmental liabilities.  We have denied liability to TCETVT for the costs associated with the lawsuit as well as the costs associated with the remediation of the contamination on the site. We have also submitted a claim notice to Harris seeking defense and indemnification from Harris under the Master Transaction Agreement for any and all claims made by TCETVT in connection with this matter. Harris has not yet agreed to indemnify us for the liability asserted by TCETVT.



We are currently party to various claims and legal proceedings, including those discussed above. When we believe that a loss is probable and the amount of the loss can be reasonably estimated, we recognize the estimated amount of the loss. We include legal costs in the estimate of losses. As additional information becomes available, we reassess any potential liability related to these matters and, if necessary, revise the estimates.

 

We do not believe, based on currently available facts and circumstances that the ultimate outcome of these matters, individually and in the aggregate, will have a material adverse effect on our financial position or overall trends in results of our operations in excess of amounts already accrued. However, litigation is subject to inherent uncertainties and unfavorable rulings could occur, including an award of substantial monetary damages or issuance of an injunction prohibiting us from selling one or more products. From time-to-time, we may enter into confidential discussions regarding the potential settlement of such lawsuits. Any settlement of pending litigation could require us to incur substantial costs and other ongoing expenses, such as future royalty payments in the case of an intellectual property dispute. There can be no assurances that the

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actual amounts required to satisfy any liabilities arising from the matters described above will not have a material adverse effect on our results of operations, financial position, or cash flows. 



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, or ICs.  We are a 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

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buffers, proximity and light sensors, data converters, optoelectronics, and interface products.  As a 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 April 1, 2016 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 year ended January 1, 2016.



Recent Accounting Guidance Not Yet Adopted

In January 2016, the Financial Accounting Standards Board, or FASB, issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which provides guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities. This ASU will be effective for us beginning in the first quarter of 2018. We are currently evaluating the impact of the adoption of this ASU on our financial statements.

In February 2016, FASB issued ASU 2016-02, Leases (Topic 842), which supersedes existing guidance on accounting for leases in "Leases (Topic 840)" and generally requires all leases to be recognized in the consolidated balance sheet. ASU 2016-02 is effective for annual and interim reporting periods beginning after December 15, 2018; early adoption is permitted. The provisions of ASU 2016-02 are to be applied using a modified retrospective approach. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.

In March 2016, FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. This ASU affects entities that issue equity-based payment awards to their employees. The ASU is designed to simplify several aspects of accounting for equity-based payment award transactions which include income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows, and forfeiture rate calculations. ASU 2016-09 will become effective for us beginning in the first quarter of 2017. Early adoption is permitted in any interim or annual period. We are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements.

Results of Operations



Unaudited condensed consolidated statements of operations data and percentage of revenue for the periods ($ in thousands):









Revenue and Gross Margin



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









Revenue decreased $4.9 million, or 3.7%, to $129.3 million during the quarter ended April 1, 2016 from $134.2 million during the quarter ended April 3, 2015.  Revenue from the industrial and infrastructure end market decreased by 9.4%  

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compared to the quarter ended April 3, 2015, while revenue from the consumer and computing end market increased by 8.4%.  In the quarter ended April 1, 2016, the unfavorable impact from changes in average selling prices, or ASPs, decreased revenue by $18.8 million, which was offset by higher overall unit demand which increased revenue by $13.9 million. 



Revenue during the quarter ended April 1, 2016 was impacted by overall weakness in the demand environment from the industrial and infrastructure end market and lower sales of certain low-margin consumer products which were deemphasized. 



On a sequential basis, we expect revenue from our industrial and infrastructure end market to increase in the second quarter of 2016 while revenue from the consumer and computing end market is expected to decrease modestly.







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







One distributor that supports a wide range of customers around the world accounted for 18.3% and 22.0% of our revenue during the quarters ended April 1, 2016 and April 3, 2015, respectively.





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 revenue, gross margin was 58.8% during the quarter ended April 1, 2016 compared to 59.9% during the quarter ended April 3, 2015.  The decrease 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 increased by 5.3% to $33.7 million during the quarter ended April 1, 2016, compared to $32.0 million during the quarter ended April 3, 2015, mainly due to higher spending on supplies and consumables relating to new product development.





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 by 7.8% to $23.5 million during the quarter ended April 1, 2016 from $25.5 million during the quarter ended April 3, 2015. The quarter ended April 3, 2015 included termination pay of $0.8 million which did not recur in the quarter ended April 1, 2016.



Amortization of Purchased Intangibles



Amortization of purchased intangibles decreased to $3.5 million during the quarter ended April 1, 2016 from $5.6 million during the quarter ended April 3, 2015.  The decrease was a result of certain intangible assets becoming fully amortized during the quarter ended January 1, 2016, offset partially by an increase in amortization related to intangible assets associated with our acquisition of Great Wall Semiconductor Corporation on September 8, 2015.

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Provision for TAOS litigation

Texas Advanced Optoelectronic Solutions, Inc., or TAOS, named us as a defendant in a lawsuit filed on November 25, 2008 in the United States District Court for the Eastern District of Texas. In this action, TAOS alleged four claims consisting of patent infringement, breach of contract, trade secret misappropriation, and tortious interference with a business relationship. On March 6, 2015, the jury found in favor of TAOS on each of the four claims and recommended to the court that we pay $48.8 million in actual damages and $10.0 million in exemplary damages on the trade secret misappropriation claim along with $74,000 in damages for patent infringement.  The jury’s verdict also included other duplicative damages of $30.0 million.  After the trial, TAOS filed post-trial motions seeking unspecified attorneys’ fees, enhanced patent infringement damages, $18.1 million in pre-judgment interest, which will continue to accrue until the judgment is entered, and a permanent injunction enjoining us from making or selling certain ambient light sensor products. We have vigorously opposed each of these motions.  We filed post-trial motions for a new trial and renewed a motion for judgment as a matter of law.  In January 2016, the court heard oral arguments on TAOS’ motions for a permanent injunction and unspecified attorneys’ fees, but declined to hear oral argument on the other motions before it.  On April 22, 2016, the court denied TAOS’ motion for permanent injunction, but allowed for a continuing reasonable royalty on parts found to be infringing TAOS’ patent.  On April 26, 2016, the court issued its order on the remaining post-trial motions, in relevant part, granting TAOS’ motion for entry of final judgment, consistent with the jury’s verdict, but without the duplicative damages.  The court also indicated it intends to award to TAOS $18.2 million in pre-judgment interest plus court costs.  After judgment is entered, we will file an appeal with the U.S. Court of Appeals for the Federal Circuit.

As a consequence of the verdict, during the quarter ended April 3, 2015, we recorded a provision of $81.1 million related to this matter, including pre-judgment interest and estimated legal costs, but excluding the damages we believe to be duplicative. No change was required to our estimate as a result of the April 26, 2016 order.  Since April 3, 2015, we incurred $3.4 million of legal costs, and, as such, the accrual outstanding as of April 1, 2016 was $77.7 million. Given the unpredictable nature of this type of litigation and because the outcome remains subject to appeal, the ultimate impact of this lawsuit may be materially different from our estimate.



(Loss) Gain on Investments, net



We have a liability for a non-qualified deferred compensation plan. We maintain a portfolio of $10.1 million in mutual fund investments and corporate-owned life insurance under the plan. Changes in the fair value of the plan assets are recorded as a gain or loss on deferred compensation investments and changes in the fair value of the deferred compensation liabilities 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 April 1, 2016, we recorded a loss of $0.1 million on deferred compensation investments and a $0.1 million gain on recovery of auction rate securities that had previously been written off. 



Income Taxes



Our income tax expense was $3.0 million, an effective tax rate of 20.1%, for the quarter ended April 1, 2016 compared to an income tax expense of $5.5 million, which equated to a negative effective tax rate of 8.7%, for the quarter ended April 3, 2015. 



Our effective tax rate for the quarter ended April 1, 2016 differs from the 35% U.S. federal statutory income tax rate due primarily to income earned in jurisdictions where the tax rate is lower than the United States, primarily in Malaysia, state income taxes, U.S. research and development tax credits, U.S. domestic production activity, and other permanent non-deductible items, such as equity based compensation associated with our cost sharing arrangement with Malaysia.  Our effective tax rate was negative for the quarter ended April 3, 2015, primarily due to losses in foreign jurisdictions related to the TAOS litigation.  The $81.1 million expense recorded for the TAOS litigation was treated as an unusual and discrete item for the quarter, for which the future tax benefit was $1.2 million, and the loss was allocated primarily to our Malaysian operations.  



Contractual Obligations and Off-Balance Sheet Arrangements



As of April 1, 2016, we had $23.2 million of open purchase orders for inventory from suppliers and $3.6 million of open asset purchase commitments for leasehold improvements and production equipment. We do not have any off-balance sheet

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arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, revenues, 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 April 1, 2016, our total stockholders’ equity was $965.2 million and we had $253.6 million in cash and cash equivalents. 



As of April 1, 2016, $199.8 million of our cash and cash equivalents were held by our foreign subsidiaries. We have provided for federal and state taxation at 37.5% in connection with our Revenue Procedure 99-32 election related to the 2008-2009 IRS examination periods, which allows for the repatriation of $125.0 million. As of April 1, 2016, $70.5 million of our cash and cash equivalents held by our foreign subsidiaries would not be subject to further taxation upon repatriation.





Operating Activities



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

Our cash flows from operations were $17.7 million during the quarter ended April 1, 2016,  as compared to $26.8 million during the quarter ended April 3, 2015. During the quarter ended April 1, 2016,  we recorded a net income of $11.8 million as compared to a net loss of $68.8 million in the quarter ended April 3, 2015.  Changes in operating assets and liabilities contributed $7.7 million in net cash outflows provided by operating activities, as compared to an outflow of $80.5 million net cash used in operating activities, in the quarters ended April 1, 2016 and April 3, 2015, respectively.  The cash flow from operating activities in the quarter ended April 3, 2015 included a provision for TAOS litigation of $81.1 million.



Accounts receivables at April 1, 2016 increased to $ 49.0 million from $ 42.6 million at January 1, 2016, an increase of $6.3 million due to higher revenue in the current quarter as well as unfavorable linearity of revenue compared to the quarter ended January 1, 2016.  Prepaid expenses and other current assets increased from $7.1 million at January 1, 2016 to $12.8 million at April 1, 2016, an increase of $5.7 million, mainly due to payroll tax deposits relating to the vesting of our employee equity-based awards. 



Investing activities

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

For the quarter ended April 1, 2016, our cash flows used in investing activities was $2.7 million, compared to $4.4 million during the quarter ended April 3, 2015. 

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.

For the quarter ended April 1, 2016, our cash flows used in financing activities was $9.6 million, compared to $11.3 million during the quarter ended April 3, 2015. 



Dividends on Common Stock



In April 2016, our Board of Directors declared a dividend of $0.12 per share of common stock resulting in dividends to be paid on or about May 27, 2016, to stockholders of record as of the close of business on May 17, 2016.

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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 and cash equivalents and investments are subject to three market risks: interest rate risk, credit risk and liquidity risk.



For further discussion of the risk related to foreign currency exchange rates and market risk, see our 2015 Annual Report on Form 10-K filed with the SEC on February 12, 2016.



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 of 1934, as amended (the “Exchange Act”)) as of April 1, 2016. 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 management concluded that, as of April 1, 2016, 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 us 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 quarter ended April 1, 2016, 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 2015 Annual Report on Form 10-K, filed with the SEC on February 12, 2016, 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.



On April 21, 2016, our Board of Directors adopted an amended and restated form of Indemnification Agreement for members of our Board and executive officers to provide indemnification consistent with changes in Delaware law occurring after the existing agreements providing for indemnification were entered into.  The foregoing description of the amended and restated form of Indemnification Agreement is a summary, does not purport to be complete, and is qualified in its entirety by reference to the full text of the Indemnification Agreement which is filed as Exhibit 10.17.



On April 21, 2016, our Board of Directors adopted amendments to our Bylaws.  The Bylaws were amended primarily to include clarifying changes to the notice and conduct requirements for meetings of stockholders and allow for electronic communications.  The foregoing description of the amended Bylaws is a summary, does not purport to be complete, and is qualified in its entirety by reference to the full text of the Fourth Amended and Restated Bylaws, a copy of which is attached hereto as Exhibit 3.2 and incorporated herein by reference.



Item 6.Exhibits.







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

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SIGNATURES



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





Date: April 26, 2016

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