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 October 21, 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

(in thousands, except per share amounts)



 







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INTERSIL CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)











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INTERSIL CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)





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INTERSIL CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 

(in thousands)





 

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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 fiscal week year, ending on the nearest Friday to December 31.  Fiscal years 2016 and 2015, are and were, respectively, 52-week years. Quarterly and annual periods vary from exact calendar quarters and years.



Pending Merger with Renesas Electronics Corporation



On September 12, 2016,  we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Renesas Electronics Corporation, a Japanese corporation (“Renesas”). The Merger Agreement provides that, upon the terms and subject to the satisfaction or valid waiver of the conditions set forth in the Merger Agreement, a wholly owned subsidiary of Renesas will merge with and into Intersil (the “Merger”), with Intersil continuing as the surviving corporation and a direct wholly owned subsidiary of Renesas. At the effective time of the Merger, each outstanding share of Class A common stock, par value $0.01 per share, of Intersil (“Class A common stock” or “common stock”), other than shares held by stockholders who have validly exercised their appraisal rights under Delaware law, and certain shares owned by Intersil, Renesas and their subsidiaries, will be automatically converted into the right to receive $22.50 in cash, without interest and less any applicable withholding taxes, plus, if applicable, the amount of any dividend which has a record date prior to the closing date of the Merger but remains unpaid as of the closing date of the Merger.



The consummation of the merger is conditioned on the receipt of the approval of our stockholders, as well as the satisfaction of other customary closing conditions, including domestic and foreign regulatory approvals and performance in all material respects by each party of its obligations under the Merger Agreement. Consummation of the Merger is not subject to a financing condition. Closing of the merger is expected in the first half of 2017.



The Merger Agreement contains certain termination rights for us and Renesas, including if a governmental body prohibits the Merger or if the Merger is not consummated before July 12, 2017. Upon termination of the Merger Agreement under specified circumstances, we or Renesas will be required to pay the other party a termination fee of $96.5 million.



We recorded transaction-related costs of $4.6 million, principally for outside financial advisory, legal, and related fees and expenses associated with the pending acquisition, in the quarter ended September 30, 2016. Additional transaction-related costs are expected to be incurred through the closing of the Merger.



Recent Accounting Guidance Not Yet Adopted

In January 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standard update, or 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.

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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. We are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements.

In April 2016, FASB issued an update to ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.  The amendments in this update clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. 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.



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 three quarters ended September 30, 2016 and October 2, 2015.



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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 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 three quarters ended September 30, 2016.



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 three quarters ended September 30, 2016.



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







 





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Note 6 — Income Taxes



Our income tax expense was $7.0 million, which equates to an effective tax rate of 30.7%, for the quarter ended September 30, 2016 compared to an income tax expense of $0.3 million, which equated to an effective tax rate of 1.7%, for the quarter ended October 2, 2015.  Our income tax expense was $10.8 million, which equates to an effective tax rate of 27.1%, for the three quarters ended September 30, 2016 compared to an income tax benefit of $16.3 million, which equated to a negative effective tax rate of 53.6%, for the three quarters ended October 2, 2015.



Our effective tax rate for the quarter ended September 30, 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 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 October 2, 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.  Additionally, the three quarters ended October 2, 2015 included a net tax benefit of $27.7 million related to the release of a reserve for an uncertain tax position for which the statutes of limitation in certain jurisdictions expired during the period.



As of September 30, 2016, we have no material changes resulting from examinations in 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 twelve months.



Note 7 — Long-Term Debt



On July 19, 2016, we entered into an amended and restated five-year, $225.0 million revolving credit facility, or the Amended Facility, that matures on July 19, 2021 and is payable in full upon maturity. The Amended Facility replaces our five-year, $325.0 million revolving credit facility, or the Facility, that would have matured on September 1, 2016. Under the Amended Facility, $50.0 million is available for the issuance of standby letters of credit, $30.0 million is available as swing line loans, and $70.0 million is available for multicurrency borrowings. Amounts repaid under the Amended Facility may be re-borrowed. We did not have any outstanding borrowings against the Amended Facility as of September 30, 2016 or against the Facility as of 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 $1.1 million and $1.3 million as of September 30, 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 April 2016 and July 2016, our Board of Directors declared quarterly cash dividends of $0.12 per share of common stock. In October 2016, our Board of Directors declared a dividend of $0.12 per share of common stock payable on or about November 28, 2016, to stockholders of record as of the close of business on November 15, 2016. Dividends paid during the three quarters ended September 30, 2016 and October 2, 2015 totaled $51.2 million and $48.9 million, respectively.



Pursuant to the terms of the Merger Agreement, we are not permitted to declare or pay any dividends on our outstanding shares of capital stock, except (i) a quarterly cash dividend in an amount not in excess of $0.12 per share of Common Stock, consistent with past practice and (ii) any dividends or dividend equivalent rights with respect to any vested equity awards.





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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 stock options (“Options”) and Awards as of and activity for the three quarters ended September 30, 2016:











(1) Grants include 345,543 MSU Awards issued during the three quarters ended September 30, 2016.

(2) Awards exercised are those that are fully vested 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 September 30, 2016 were 121,000 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 based Grants — As of September 30, 2016, we had Options and Awards outstanding that include service conditions as well as market conditions related to total stockholder return. 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 earnings (loss) 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



Other than as stated in this Note 12, there were no material changes in our legal matters and indemnifications, from those 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.  After certain post-trial motions were heard, the court entered a final judgment on June 9, 2016 against us in the amount of $77.3 million plus court costs and a continuing royalty on certain products found to be infringing TAOS’ patent.  On June 10, 2016, we filed a notice of appeal; TAOS filed a notice of cross-appeal. Our opening brief is due to be filed on October 28, 2016. 

As a consequence of the jury’s 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. As a result of the entry of the June 9, 2016 judgment, we increased our accrual for this matter by $1.3 million in the quarter ended July 1, 2016. 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.

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Environmental matter



In correspondence dated September 28, 2015, counsel for 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, or GE, 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.  In its September 28, 2015 letter, TCETVT 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. 



By letter dated June 22, 2016 from counsel for GE and by letter dated July 14, 2016 from counsel for TCETVT, we were advised that in April 2016 the Taiwan Supreme Court denied the request to add additional claimants to the existing lawsuit and that, in response to the denial, the plaintiffs filed a new, but related lawsuit, claiming damages on behalf of 1,147 new claimants as well as adding additional sites at which the toxic torts were alleged to have occurred, such that the resulting liability could be as high as an additional $225.0 million.

 

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.



Export Compliance Settlement



A portion of our activities are subject to export control regulations administered by the U.S. Department of State, or DOS, under the U.S. Arms Export Control Act, or AECA, and the International Traffic in Arms Regulations, or ITAR.  In September 2010, in response to a request for information, we disclosed to the Directorate of Defense Trade Controls, or DTCC, information concerning export activities for the years of 2005 through 2010.  ITAR gives the DOS authority to impose civil penalties and other administrative sanctions for violations, including debarment from engaging in the exporting of defense articles.  In June of 2013, the DTCC notified us of potential ITAR violations and that it was considering pursuing administrative proceedings against us.  On June 16, 2014, we entered into a Consent Agreement with the DTCC for the purpose of resolving the potential ITAR violations.  The Consent Agreement contained a two-year term and provided for: (i) payment of an aggregate civil penalty of $10.0 million, $4.0 million of which was suspended and eligible for an offset credit based on verified expenditures for certain past and future remedial compliance measures; (ii) the appointment of an Internal Special Compliance Official to oversee compliance with the Consent Agreement and U.S. export control regulations, in general; (iii) two external audits of our ITAR compliance program; and (iv) continued implementation of ongoing remedial compliance measures and additional remedial compliance measures related to automated systems and ITAR compliance policies, procedures, and training.  In connection with the Consent Agreement, we estimated and recorded a $6.0 million charge in the quarter ended October 4, 2013 and an additional $4.0 million charge in the quarter ended April 4, 2014, when the amount of the penalty was determined.  The $6.0 million portion of the settlement, which was not subject to suspension, was paid in two installments of $3.0 million each, in June 2014 and June 2015.  On March 29, 2016, we notified the DTCC that we had met all of the requirements under the Consent Agreement, as required by Paragraph 30 of the Consent Agreement.  On June 17, 2016, we notified the DTCC that the investments we had made in our export control compliance program, which included additional staffing, ongoing implementation of a new software system, employee training, and establishment of a regular compliance audit program and corrective action process, were eligible for credit against the entire amount of the suspended portion of the settlement amount.  On June 20, 2016, the DTCC notified us that the expenses we incurred were eligible for and credited against the entire $4.0 million suspended payment.  Finally, on June 21, 2016, the DTCC notified us that it had closed the Consent Agreement based, in part, on DTCC’s conclusion that we had fulfilled the terms of the Consent Agreement.



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.

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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 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.



Note 13 — Assets held for sale and Restructuring and Related Costs



On June 29, 2016, we began implementation of a plan to decommission our 200 millimeter wafer fabrication line in Palm Bay, Florida or the 200mm Line.  The investment in the 200mm Line was made approximately four years ago to address the need to extend the production life of certain products manufactured at a third party wafer foundry when the supply commitments from the supplier for these products were set to expire at the end of 2014.  In July 2015, the supplier was acquired and the acquirer recently decided to continue long-term support for the manufacturing of these products.  To avoid the future capital investment anticipated to be required for the 200mm Line, we determined it would be beneficial to our long-term cost structure to source the manufacturing for these products from this supplier and decommission our 200mm Line. Due to this shift in manufacturing to an outside provider, we recorded an impairment charge of $9.9 million during the quarter ended July 1, 2016 on these long-lived assets related to the 200mm Line. The impairment charge was calculated as the excess of the assets’ carrying value over their fair value as determined by the market prices of these types of assets. We also recorded impairment charges of $1 million during the quarter ended July 1, 2016 for specific inventory items related to the 200 mm Line which had no alternative use. In addition we recorded $2.5 million of severance and other employee benefit costs in the quarter ended July 1, 2016 related to the decommissioning and other cost reduction actions.



During the quarter ended September 30, 2016, long lived assets (comprising of property, plant and equipment with a net book value of $4.9 million) relating to the 200 mm Line have been classified as assets held for sale. We measure long-lived assets to be disposed of by sale at the lower of carrying amount or fair value less cost to sell. Fair value is determined using quoted market prices or the anticipated cash flows discounted at a rate commensurate with the risk involved. No additional gain or loss was recorded since these assets were reduced to their fair value during the quarter ended July 1, 2016. We have entered into an agreement for sale of these assets and received an advance of $2.5 million. We expect to complete the sale within next twelve months.





—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 our pending merger with Renesas Electronics Corporation (“Renesas”) as well as other 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.



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Overview



We are a leading provider of innovative power management and precision analog semiconductor solutions. Our products form the building blocks of increasingly intelligent, mobile and power-hungry electronics, enabling advances in power management to improve efficiency and extend battery life. With a deep portfolio of intellectual property and a rich history of design and process innovation, we are the trusted partner to leading companies in some of the world’s largest markets, including industrial and infrastructure, mobile computing, automotive and aerospace.

Critical Accounting Policies



There have been no significant changes to our critical accounting policies during the three quarters ended September 30, 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 Accounting Standards Update, or 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 consolidated 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. We are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements.

In April 2016, FASB issued an update to ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.  The amendments in this update clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. We are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements.

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Results of Operations



Pending Merger with Renesas Electronics Corporation



On September 12, 2016, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Renesas Electronics Corporation, a Japanese corporation (“Renesas”). The Merger Agreement provides that, upon the terms and subject to the satisfaction or valid waiver of the conditions set forth in the Merger Agreement, a wholly owned subsidiary of Renesas will merge with and into Intersil (the “Merger”), with Intersil continuing as the surviving corporation and a direct wholly owned subsidiary of Renesas. At the effective time of the Merger, each outstanding share of Class A common stock, par value $0.01 per share, of Intersil, other than shares held by stockholders who have validly exercised their appraisal rights under Delaware law, and certain shares owned by Intersil, Renesas and their subsidiaries, will be automatically converted into the right to receive $22.50 in cash, without interest and less any applicable withholding taxes, plus, if applicable, the amount of any dividend which has a record date prior to the closing date of the Merger but remains unpaid as of the closing date of the Merger.



The consummation of the merger is conditioned on the receipt of the approval of our stockholders, as well as the satisfaction of other customary closing conditions, including domestic and foreign regulatory approvals and performance in all material respects by each party of its obligations under the Merger Agreement. Consummation of the Merger is not subject to a financing condition.



The Merger Agreement contains certain termination rights for us and Renesas, including if a governmental body prohibits the Merger or if the Merger is not consummated before July 12, 2017. Upon termination of the Merger Agreement under specified circumstances, we or Renesas will be required to pay the other party a termination fee of $96.5 million. For additional details on the transaction, refer to the copy of the Merger Agreement attached as an Exhibit to the Form 8-K filed with the U.S. Securities and Exchange Commission on September 13, 2016.



We recorded transaction-related costs of $4.6 million, principally for outside financial advisory, legal, and related fees and expenses associated with the pending acquisition in the quarter ended September 30, 2016. Additional transaction-related costs are expected to be incurred through the closing of the Merger.



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





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Revenue and Gross Margin



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









Revenue increased by $10.6 million, or 8.3%, to $139.0 million during the quarter ended September 30, 2016 from $128.4 million during the quarter ended October 2, 2015.  Revenue from the industrial and infrastructure end market increased by 7.8% compared to the quarter ended October 2, 2015 with automotive and aerospace end markets exhibiting strong growth. Revenue from the consumer and computing end market increased by 9.3% helped by introduction of new products.  In the quarter ended September 30, 2016, the favorable impact from changes in average selling prices, or ASPs, increased revenue by $2.7 million, and higher overall unit demand also increased revenue by $7.9 million.



Revenue increased by $7.3 million, or 1.9%, to $402.3 million during the three quarters ended September 30, 2016 from $395.0 million during the three quarters ended October 2, 2015.  Revenue from the industrial and infrastructure end market decreased by 0.5% compared to the three quarters ended October 2, 2015, while revenue from the consumer and computing end market increased by 6.5% helped by new product introductions. In the three quarters ended September 30, 2016, higher overall unit demand increased revenue by $31.3 million, which was partially offset by the unfavorable impact from changes in ASPs, which decreased revenue by $24.0 million.



We expect revenue to grow in the future driven by demand for new automotive and infrastructure power products in the industrial and infrastructure end markets, combined with new product ramps for our mobile power products in the consumer and computing end markets.



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







One distributor that supports a wide range of customers around the world accounted for 20.1% and 20.9% of our revenue during the quarters ended September 30, 2016 and October 2, 2015, respectively, and 18.7% and 21.6% of our revenue during the three quarters ended September 30, 2016 and October 2, 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 60.6% during the quarter ended September 30, 2016 compared to 59.2% during the quarter ended October 2, 2015.  The increase in gross margin was primarily due to a change in the mix of products sold. 



As a percentage of revenue, gross margin was 59.6% during the three quarters ended September 30, 2016 compared to 59.5% during the three quarters ended October 2, 2015.  The increase in gross margin was primarily due to a change in the mix of products sold. 



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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 marginally by 0.2% to $31.3 million during the quarter ended September 30, 2016, compared to $31.2 million during the quarter ended October 2, 2015.



R&D expenses increased by 2.9% to $99.2 million during the three quarters ended September 30, 2016, compared to $96.4 million during the three quarters ended October 2, 2015, mainly due to higher variable compensation expense.



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 3.2% to $22.8 million during the quarter ended September 30, 2016, compared to $23.5 million during the quarter ended October 2, 2015, mainly due to reduction in facilities expenses offset by higher variable compensation expense.



SG&A expenses decreased by 3.5% to $71.6 million during the three quarters ended September 30, 2016 from $74.2 million during the three quarters ended October 2, 2015.  The three quarters ended October 2, 2015 included termination pay of $1.1 million which did not recur in the three quarters ended September 30, 2016. In addition, spending on legal and professional services was lower in the three quarters ended September 30, 2016 offset by higher variable compensation expense.



Amortization of Purchased Intangibles



Amortization of purchased intangibles decreased to $2.7 million during the quarter ended September 30, 2016 from $3.8 million during the quarter ended October 2, 2015 and decreased to $9.1 million during the three quarters ended September 30, 2016 from $13.4 million during the three quarters ended October 2, 2015.  These decreases were a result of certain intangible assets becoming fully amortized during the three quarters ended September 30, 2016 and 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.



Restructuring and related costs



On June 29, 2016, we began implementation of a plan to decommission our 200 millimeter wafer fabrication line in Palm Bay, Florida or the 200mm Line.  The investment in the 200mm Line was made approximately four years ago to address the need to extend the production life of certain products manufactured at a third party wafer foundry when the supply commitments from the supplier for these products were set to expire at the end of 2014.  In July 2015, the supplier was acquired and the acquirer recently decided to continue long-term support for the manufacturing of these products.  To avoid the future capital investment anticipated to be required for the 200mm Line, we determined it would be beneficial to our long-term cost structure to source the manufacturing for these products from this supplier and decommission our 200mm Line. Due to this shift in manufacturing to an outside provider, we recorded an impairment charge of $9.9 million during the quarter ended July 1, 2016 on these long-lived assets related to the 200mm Line. The impairment charge was calculated as the excess of the assets’ carrying value over their fair value as determined by the market prices of these types of assets. We also recorded impairment charges of $1 million during the quarter ended July 1, 2016 for specific inventory items related to the 200 mm Line which had no alternative use. In addition we recorded $2.5 million of severance and other employee benefit costs in the quarter ended July 1, 2016 related to the decommissioning and other cost reduction actions. We have entered into an agreement for sale of these assets and received an advance of $2.5 million. We expect to complete the sale within next twelve months.



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Provision for the 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.  After certain post-trial motions were heard, the court entered a final judgment on June 9, 2016 against us in the amount of $77.3 million plus court costs and a continuing royalty on certain products found to be infringing TAOS’ patent.  On June 10, 2016, we filed a notice of appeal; TAOS filed a notice of cross-appeal. Our opening brief is due to be filed on October 28, 2016.

As a consequence of the jury’s 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. As a result of the entry of the June 9, 2016 judgment, we increased our accrual for this matter by $1.3 million during the quarter ended July 1, 2016.  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.



Gain (loss) on Investments, net



We have a liability for a non-qualified deferred compensation plan. We maintain a portfolio of $10 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 September 30, 2016, we recorded a gain of $0.3 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 $7.0 million, which equates to an effective tax rate of 30.7%, for the quarter ended September 30, 2016 compared to an income tax expense of $0.3 million, which equated to an effective tax rate of 1.7%, for the quarter ended October 2, 2015.  Our income tax expense was $10.8 million, which equates to an effective tax rate of 27.1%, for the three quarters ended September 30, 2016 compared to an income tax benefit of $16.3 million, which equated to a negative effective tax rate of 53.6%, for the three quarters ended October 2, 2015.



Our effective tax rate for the quarter ended September 30, 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 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 October 2, 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.  Additionally, the three quarters ended October 2, 2015 included a net tax benefit of $27.7 million related to the release of a reserve for an uncertain tax position for which the statutes of limitation in certain jurisdictions expired during the period.



Contractual Obligations and Off-Balance Sheet Arrangements



As of September 30, 2016,  we had $13.7 million of open purchase orders for inventory from suppliers and $3.1 million of open asset purchase commitments for leasehold improvements and production equipment. 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, expenses, results of operations, liquidity, capital expenditures, or capital resources.



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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 September 30, 2016, our total stockholders’ equity was $974.7 million and we had $284 million in cash and cash equivalents.



As of September 30, 2016, $217.7 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 September 30, 2016, $70.5 million of our cash and cash equivalents held by our foreign subsidiaries would not be subject to further taxation upon repatriation.



On July 19, 2016, we entered into an amended and restated five-year, $225.0 million revolving credit facility, or the Amended Facility, that matures on July 19, 2021 and is payable in full upon maturity. The Amended Facility replaces our five-year, $325.0 million revolving credit facility, or the Facility, that would have matured on September 1, 2016. Under the Amended Facility, $50.0 million is available for the issuance of standby letters of credit, $30.0 million is available as swing line loans, and $70.0 million is available for multicurrency borrowings. Amounts repaid under the Amended Facility may be re-borrowed. We did not have any outstanding borrowings against the Amended Facility as of September 30, 2016 or against the Facility as of January 1, 2016.



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 $68.1 million during the three quarters ended September 30, 2016, as compared to $85.8 million during the three quarters ended October 2, 2015. During the three quarters ended September 30, 2016, we recorded a net income of $29 million as compared to a net loss of $14.1 million in the three quarters ended October 2, 2015.  Changes in operating assets and liabilities contributed $10.6 million in net cash outflows from operating activities, as compared to cash inflows of $62.8 million from operating activities, in the three quarters ended September 30, 2016 and October 2, 2015, respectively.



The changes in operating assets and liabilities during the three quarters ended September 30, 2016 were primarily due to the following:





Investing activities

Investing cash flows consist primarily of capital expenditures, net off capital advances received and net investment purchases and maturities.

For the three quarters ended September 30, 2016, our cash flows used in investing activities were $3.1 million, compared to $26.7 million during the three quarters ended October 2, 2015, primarily due to the acquisition of Great Wall Semiconductor during the quarter ended October 2, 2015 and a decrease in purchases of property, plant, and equipment during the three quarters ended September 30, 2016.

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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 three quarters ended September 30, 2016, our cash flows used in financing activities were $29.5 million, compared to $40.1 million during the three quarters ended October 2, 2015, primarily due to increase in proceeds from exercise of employee stock options during the three quarters ended September 30, 2016.



Dividends on Common Stock



In October 2016, our Board of Directors declared a dividend of $0.12 per share of common stock payable on or about November 28, 2016, to stockholders of record as of the close of business on November 15, 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, or the “Exchange Act”) as of September 30, 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 September 30, 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 September 30, 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. The following risk factors also could also affect our financial condition and results of operations.



There are risks and uncertainties associated with the Merger.



On September 12, 2016, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Renesas Electronics Corporation, a Japanese corporation (“Renesas”). The Merger Agreement provides that, upon the terms and subject to the satisfaction or valid waiver of the conditions set forth in the Merger Agreement, a wholly-owned subsidiary of Renesas will merge with and into Intersil (the “Merger”), with Intersil continuing as the surviving corporation and a wholly-owned subsidiary of Renesas. The consummation of the merger is conditioned on the receipt of the approval of our stockholders, as well as the satisfaction of other customary closing conditions, including domestic and foreign regulatory approvals and performance in all material respects by each party of its obligations under the Merger Agreement. Consummation of the Merger is not subject to a financing condition. There is no assurance that the conditions to the Merger will be satisfied in a timely manner or at all. Additionally, if the Merger is not completed, we may suffer a number of consequences that could adversely affect our business, results of operations, and stock price. There are numerous risks related to the Merger, including the following:





In addition, we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the Merger, and these fees and costs are payable by us regardless of whether the Merger is consummated.





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.

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Item 5.Other Information.



None



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: October 25, 2016

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