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ISIL > SEC Filings for ISIL > Form 10-Q on 2-Nov-2012All Recent SEC Filings

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Form 10-Q for INTERSIL CORP/DE


2-Nov-2012

Quarterly Report


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

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

Forward Looking Statements

This Quarterly Report on Form 10-Q contains statements relating to expected future results and business trends of Intersil Corporation ("Intersil") that are based upon our current estimates, expectations, assumptions and projections about our industry, as well as upon certain views and beliefs held by management, that are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995, 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:

industry and global economic and market conditions, such as the cyclical nature of the semiconductor industry and the markets addressed by our and our customers' products;

global economic weakness, including insufficient credit available for our customers to purchase our products;

successful development of new products;

the timing of new product introductions and new product performance and quality;

manufacturing difficulties, such as the availability, cost and extent of utilization of manufacturing capacity and raw materials;

the failure of our suppliers or outsource providers to perform their obligations in a manner consistent with our expectations;

pricing pressures and other competitive factors, such as competitors' new products;

changes in product mix;

product obsolescence;

legal challenges to our products and technology, such as intellectual property infringement and misappropriation claims;

customer service;

the need for additional capital;

legislative, tax, accounting, or regulatory changes or changes in their interpretation;

the ability to develop and implement new technologies and to obtain protection of the related intellectual property;

the successful integration of acquisitions;

demand for, and market acceptance of, new and existing products;

the extent and timing that customers order and use our products and services in their production or business;

competitors with significantly greater financial, technical, manufacturing and marketing resources;

fluctuations in manufacturing yields;

procurement shortage;

transportation, communication, demand, information technology or supply disruptions based on factors outside our control such as natural disasters, wars, and terrorist activities;

changes in import export regulations; and

exchange rate fluctuations.

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

Overview

We design, develop, manufacture and market high-performance analog, mixed-signal and power integrated circuits ("ICs"). We believe our product portfolio addresses some of the fastest growing applications within the Industrial & Infrastructure, Consumer, and Personal Computing markets.


Critical Accounting Policies

You should refer to the disclosures regarding critical accounting policies in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2011.

We perform our annual test of impairment of our goodwill in our fourth quarter. The global economic environment and challenging market conditions have resulted in declines in our stock price, market capitalization, and future expected cash flows as well as significant adverse changes in the business climate and continuing slower growth rates. Based on these factors, we may need to record an impairment charge against our goodwill in the fourth quarter of 2012 based on our analysis. See additional disclosures regarding the judgments and estimates related to the assessment of recoverability of goodwill in our Annual Report on Form 10-K for the fiscal year ended December 30, 2011.

Results of Operations

Statement of operations data and percentage of revenue for the periods (% of
revenue):




                                           Quarter ended       Three quarters ended
                                       September   September   September   September
                                       28, 2012    30, 2011    28, 2012    30, 2011
Revenue                                  100.0%      100.0%      100.0%      100.0%
Cost of revenue                           45.9%       43.0%       45.6%       42.3%
Gross Profit                              54.1%       57.0%       54.4%       57.7%
Operating costs and expenses:
Research and development                  25.6%       24.4%       27.5%       24.1%
Selling, general and administrative       19.9%       18.3%       21.4%       17.8%
Amortization of purchased intangibles      4.7%        3.5%        4.6%        3.4%
Income from intellectual property
agreement                                 (8.9%)          -%      (2.9%)          -%
Restructuring and related costs               -%          -%       2.1%        0.4%
Operating income                          12.7%       10.8%        1.7%       12.1%
Interest income                            0.1%        0.4%        0.1%        0.4%
Interest expense and fees                 (1.3%)      (2.0%)      (1.2%)      (2.1%)
Loss on extinguishment of debt                -%      (4.5%)          -%      (1.4%)
Gain (loss) on deferred compensation
investments, net                           0.4%       (0.6%)       0.2%       (0.2%)
Income before income taxes                11.9%        4.0%        0.7%        8.8%
Income tax expense                        10.6%        0.2%        4.1%        1.5%
Net income (loss)                          1.3%        3.9%       (3.4%)       7.2%

Note: Totals and percentages may not add or calculate precisely due to rounding. We have modified end market data below in the quarter(s) ended September 30, 2011 to conform to the presentation in the quarter(s) ended September 28, 2012, which we feel better reflects the different characteristics of our end markets. Historical data of revenues in each of these end markets is included with our Current Report on Form 8-K, furnished on April 25, 2012.

Revenue and Gross Profit

Revenue decreased $35.4 million or 18.9% to $151.4 million during the quarter ended September 28, 2012 from $186.8 million during the quarter ended September 30, 2011. The decrease in sales was broad-based in each of our end markets. Sales into the personal computing market decreased 29.6% compared to the quarter ended September 30, 2011, while sales into the consumer market decreased 25.0% and sales into the industrial and infrastructure market decreased 11.0%.

Revenues by end market were as follows ($ in millions):

                                                          Quarter ended
                                       September 28, 2012                September 30, 2011
                                     Revenue        % of Revenue       Revenue       % of Revenue
Industrial & Infrastructure     $            85.6         56.5%    $          96.2         51.5%
Personal Computing              $            33.3         22.0%    $          47.3         25.3%
Consumer                        $            32.5         21.5%    $          43.3         23.2%
Total                           $           151.4        100.0%    $         186.8        100.0%


In aggregate, a 18.1% decrease in unit shipments decreased net revenue from third quarter of 2011 levels by $33.8 million and average selling prices ("ASPs") decreased 1.1%, decreasing revenues by $1.6 million. Declining sales prices at the product level have occurred within the semiconductor industry for much of its existence. While individual products generally experience ASP declines over time, we endeavor to continually introduce new products which typically enter the market at prices higher than existing products. Fluctuations in ASPs are expected to continue into the future.

Revenue decreased $124.3 million or 20.9% to $470.4 million during the three quarters ended September 28, 2012 from $594.7 million during the three quarters ended September 30, 2011. The decrease in sales was broad-based in each of our end markets. Sales into the consumer market decreased 31.9% compared to the three quarters ended September 30, 2011, while sales into the personal computing market decreased 25.5% and sales into the industrial and infrastructure market decreased 14.0%.

Revenues by end market were as follows ($ in millions):

                                                      Three quarters ended
                                       September 28, 2012                September 30, 2011
                                     Revenue        % of Revenue       Revenue       % of Revenue
Industrial & Infrastructure     $           268.3         57.0%    $         312.0         52.4%
Personal Computing              $           112.7         24.0%    $         151.4         25.5%
Consumer                        $            89.4         19.0%    $         131.3         22.1%
Total                           $           470.4        100.0%    $         594.7        100.0%

In aggregate, a 20.1% decrease in unit shipments decreased net revenue from year-to-date 2011 levels by $119.4 million and ASP's decreased 1.0%, decreasing revenues by $4.9 million.

Geographically, year-to-date revenues were derived from the Asia/Pacific, North America and Europe regions as follows ($ in millions):

                                         Three quarters ended
                          September 28, 2012                September 30, 2011
                        Revenue        % of Revenue       Revenue       % of Revenue
Asia/Pacific       $           368.9         78.4%    $         460.1         77.4%
North America      $            68.2         14.5%    $          86.6         14.6%
Europe and other   $            33.3          7.1%    $          48.0          8.0%
Total              $           470.4        100.0%    $         594.7        100.0%

We anticipate that our revenue from Asia/Pacific region customers will continue to grow in percentage terms as that region leads in the manufacture of the finished goods in which our products are used. End market demand for those products is global and therefore dependent on aggregate global economic metrics and conditions such as personal incomes and business activity, and not necessarily on Asian and Pacific Rim regional economic factors.


We sell our products to customers in many countries including, in descending order by revenue dollars for our top ten countries, China (including Hong Kong), the United States, South Korea, Japan, Germany, Singapore, Taiwan, Thailand, Mexico, and Malaysia. Sales to customers in China (including Hong Kong) comprised approximately 55.3% of revenue, followed by the United States (13.6%) and South Korea (8.7%) during the three quarters ended September 28, 2012. Two distributors that support a wide range of customers around the world accounted for 15.0% and 13.1% of our revenues in the three quarters ended September 28, 2012. Two original design manufacturers accounted for 8.5% and 7.7% of our revenues for the three quarters ended September 28, 2012.

Cost of Revenue and Gross Profit

Cost of revenue consists primarily of purchased materials and services, labor, overhead and depreciation associated with manufacturing pertaining to products sold. During the quarter ended September 28, 2012, gross profit decreased $24.6 million or 23.1% to $81.9 million from $106.5 million during the quarter ended September 30, 2011. As a percentage of sales, gross margin was 54.1% during the quarter ended September 28, 2012 compared to 57.0% during the quarter ended September 30, 2011.The decrease in gross margin was primarily due to lower internal utilization and product sales mix changes at the product family level.

During the three quarters ended September 28, 2012, gross profit decreased $87.5 million or 25.5% to $255.9 million from $343.4 million during the three quarters ended September 30, 2011. As a percentage of sales, gross margin was 54.4% during the three quarters ended September 28, 2012 compared to 57.7% during the three quarters ended September 30, 2011. The decrease in gross margin was primarily due to lower internal utilization and product sales mix changes at the product family level.

Generally, our personal computing and consumer products have lower gross margins than our industrial and infrastructure products. We strive to improve gross margins from their present levels by emphasizing new high-margin products and cost saving opportunities in our manufacturing chain. However, recent declines in sales have affected our internal utilization and therefore our per unit cost, exerting significant downward pressure on margins.

Operating Costs and Expenses

Research and Development ("R&D")

R&D expenses consist primarily of salaries and expenses of employees engaged in product/process research, design and development activities, as well as related subcontracting activities, prototype development, cost of design tools and technology license agreement expenses.

R&D expenses decreased $6.9 million or 15.2% to $38.7 million during the quarter ended September 28, 2012 from $45.7 million during the quarter ended September 30, 2011. We reduced our R&D spending primarily through cost reduction initiatives primarily in labor and incentive compensation.

R&D expenses decreased $13.8 million or 9.6% to $129.3 million during the three quarters ended September 28, 2012 from $143.1 million during the three quarters ended September 30, 2011. We reduced our R&D spending primarily through cost reduction initiatives primarily in labor and incentive compensation.

Selling, General and Administrative ("SG&A")

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

SG&A expenses decreased $4.0 million or 11.8% to $30.2 million during the quarter ended September 28, 2012 from $34.2 million during the quarter ended September 30, 2011. The decrease was driven primarily by cost reduction initiatives primarily in labor and incentive compensation and decreased legal and other professional fees.


SG&A expenses decreased $4.9 million or 4.7% to $100.8 million during the three quarters ended September 28, 2012 from $105.7 million during the three quarters ended September 30, 2011. The decrease was driven by cost reduction initiatives primarily labor and incentive compensation and decreased marketing costs.

Amortization of Purchased Intangibles

Amortization of purchased intangibles increased $0.6 million or 8.8% to $7.1 million during the quarter ended September 28, 2012 from $6.5 million during the quarter ended September 30, 2011. Amortization of purchased intangibles increased $1.4 million or 7.0% to $21.5 million during the three quarters ended September 28, 2012 from $20.1 million during the three quarters ended September 30, 2011. The increase related to additional amortization on in-process research and development projects acquired from Techwell, Inc. and completed during the quarter ended March 30, 2012.

Income from Intellectual Property Agreement

Income from intellectual property agreement was $13.4 million, net of costs, and related to an agreement settling a trade secret misappropriation and patent infringement dispute with another semiconductor company. Under the terms of the agreement, Intersil has no future performance obligation.

Restructuring and related costs

Restructuring costs were minimal in the quarters ended September 28, 2012 and September 30, 2011. Restructuring costs were $9.8 million in the three quarters ended September 28, 2012 and $2.4 million in the three quarters ended September 30, 2011. The 2012 restructuring expense related to our ongoing efforts to optimize operations. It included a workforce reduction of approximately 11% and an ongoing reduction in annual operating expenses of approximately $40.0 million.

Other Income and Expenses

Interest Income

Interest income decreased $0.6 million to $0.1 million during the quarter ended September 28, 2012 from $0.7 million during the quarter ended September 30, 2011. Interest income decreased $1.7 million to $0.4 million during the three quarters ended September 28, 2012 from $2.2 million during the three quarters ended September 30, 2011. The decrease was due primarily to the sale of our remaining auction rate securities in the fourth quarter of 2011.

Interest Expense and Fees

Interest expense and fees decreased $1.8 million to $2.0 million during the quarter ended September 28, 2012 from $3.8 million during the quarter ended September 30, 2011. Interest expense and fees decreased $6.7 million to $5.9 million during the three quarters ended September 28, 2012 from $12.5 million during the three quarters ended September 30, 2011. The decrease was due to the replacement of our previous long-term debt agreement with a new revolving loan facility with a lower interest rate and repayments of our debt.

Loss on Extinguishment of Debt

During the quarter ended September 30, 2011, we extinguished our previous term-loan agreement and wrote-off $8.4 million in unamortized loan fees.


Gain (Loss) on Deferred Compensation Investments, Net

We have a liability for a non-qualified deferred compensation plan. We maintain a portfolio of approximately $ 11.7 million in mutual fund investments and corporate owned life insurance under the plan. Changes in the fair value of the asset are recorded as a gain or loss on deferred compensation investments and changes in the fair value of the liability are recorded as a component of compensation expense. In general, the compensation expense or benefit is substantially offset by the gains and losses on the investment. During the quarter ended September 28, 2012, we recorded a gain of $0.7 million on deferred compensation investments and an increase in compensation expense of $0.7 million. During the three quarters ended September 28, 2012, we recorded a gain on deferred compensation investments of $0.9 million and a $1.0 million increase in compensation expense.

Income Tax Expense

Income tax expense for the quarter ended September 28, 2012 was $16.0 million compared with $0.3 million for the quarter ended September 30, 2011. The effective tax rate for the quarter ended September 28, 2012 was higher than the same quarter last year due to a greater portion of income in higher tax jurisdictions, lower pre-tax income, and the expiration of the research and development credit.

Income tax expense for the three quarters ended September 28, 2012 was $19.1 million compared with $9.1 million for the three quarters ended September 30, 2011. The three quarters ended September 28, 2012 included an $11.7 million discrete tax charge related to a tax election on transfer pricing in connection with the resolution of the IRS audit of tax years 2005-2007. The effective tax rate for the three quarters ended September 28, 2012, excluding discrete items, was higher than the prior year due to a greater portion of income in higher tax jurisdictions, lower pre-tax income, and the expiration of the research and development credit.

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

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

Backlog

Our sales are made pursuant to purchase orders that are generally booked up to six months in advance of delivery. Our standard terms and conditions of sale provide that these orders may not be cancelled or rescheduled thirty days prior to the most current customer request date ("CRD") for standard products and ninety days prior to the CRD for semi-custom and custom products. Backlog is influenced by several factors, including end market demand, pricing and customer order patterns in reaction to product lead times. Additionally, we believe backlog can decline faster than consumption rates in periods of weak end market demand since production lead times can be shorter. Conversely, we believe backlog can grow faster than consumption in periods of strong end market demand as production and delivery times increase and some customers may increase orders in excess of their current consumption to reduce their own risk of production disruptions.

Our six-month backlog was $118.5 million as of September 28, 2012 compared to $134.8 million as of December 30, 2011 and $141.3 million as of September 30, 2011. Although not always the case, we believe backlog can be an indicator of performance in the near future.

Business Outlook

In our third quarter 2012 earnings release, furnished as an exhibit to the Form 8-K we filed with the Securities and Exchange Commission ("SEC") on October 24, 2012, we announced anticipated revenues for the fourth quarter of 2012 to be in the range of $135 million to $141 million. Based on this outlook, we stated that we expect fourth quarter 2012 loss per diluted share to be approximately $(0.09) per share.


Contractual Obligations and Off-Balance Sheet Arrangements

Our contractual obligations and off-balance sheet arrangements have not changed significantly from December 30, 2011. As of September 28, 2012, we had $19.2 million of open purchase orders for inventory from suppliers.

Liquidity and Capital Resources

Our capital requirements depend on a variety of factors, including but not limited to, the rate of increase or decrease in our existing business base; the success, timing and amount of investment required to bring new products to market; revenue growth or decline; and potential acquisitions. As of September 28, 2012, our total shareholders' equity was $1,034.7 million and we had $317.1 million in cash and cash equivalents. We had $4.8 million in short-term investments, consisting of bank time deposits, as of September 28, 2012. In addition, as of September 28, 2012, we had $150.0 million in long-term debt outstanding (see Note 9 in the accompanying unaudited consolidated financial statements).

As of September 28, 2012, approximately $159.1 million of our cash and cash equivalents was held by our foreign subsidiaries. These funds would be subject to federal and state taxation at approximately 37.5% upon repatriation, net of any foreign tax credits that might be available. We currently do not intend nor foresee a need to repatriate any additional funds. As of September 28, 2012, all of our short-term investments were held domestically.

We expect existing domestic cash and cash equivalents and cash flows from operations to continue to be sufficient to fund our domestic operating activities and cash commitments for investing and financing activities, such as regular quarterly dividends, debt repayment schedules, and material capital expenditures, for at least the next 12 months and thereafter for the foreseeable future. In addition, we expect existing foreign cash and cash equivalents, short-term investments, and cash flows from operations to continue to be sufficient to fund our foreign operating activities and cash commitments for investing activities, such as material capital expenditures, for at least the next 12 months and thereafter for the foreseeable future.

Our primary sources and uses of cash during the three quarters ended September 28, 2012 and September 30, 2011 were as follows (in millions):

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