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ISIL > SEC Filings for ISIL > Form 10-K on 18-Feb-2014All Recent SEC Filings

Show all filings for INTERSIL CORP/DE

Form 10-K for INTERSIL CORP/DE


18-Feb-2014

Annual Report


Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion in conjunction with our accompanying consolidated financial statements, including the related notes. This discussion generally refers to elements within our accompanying consolidated financial statements on a pre-tax basis unless otherwise stated. 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. For further information regarding risks and uncertainties, see Item 1A. "Risk Factors" in this Annual Report on Form 10-K.

Overview

We design and develop innovative power management and precision analog integrated circuits (ICs). We were formed in August 1999 when we acquired the semiconductor business of Harris Corporation and began operating as Intersil Corporation. That semiconductor business included product portfolios and intellectual property dating back to 1967 when semiconductor companies were just emerging in Silicon Valley. We are now an established supplier of power management and precision analog technology for many of the most rigorous applications in the computing, consumer and industrial markets. We supply a full range of power IC solutions including battery management, computing power, display power, regulators and controllers and power modules; as well as precision analog components such as amplifiers and buffers, proximity and light sensors, data converters, optoelectronics and interface products. As a major supplier to the military and aerospace industries, our product development methodologies reflect experience designing products to meet the highest standards for reliability and performance in challenging environments.


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We utilize a 52/53 week fiscal year, ending on the nearest Friday to December
31. Fiscal year 2013 is a 53 week period with an extra week included in our second quarter. All other years presented are fiscal years and contain 52 weeks. Quarterly or annual periods vary from exact calendar quarters or years.

Statement of Operations ($ in thousands and % of revenue):





                                     2013                       2012                      2011
Revenue                      $    575,195   100.0  %    $    607,864   100.0  %   $    760,490   100.0  %
Cost of revenue                  258,588     45.0           277,698     45.7          323,165     42.5
Gross profit                     316,607     55.0           330,166     54.3          437,325     57.5
Operating costs and
expenses:
Research and development         130,541     22.7           166,884     27.5          185,458     24.4
Selling, general and
administrative                   113,333     19.7           134,314     22.1          140,314     18.5
Amortization of purchased
intangibles                       24,579      4.3            29,185      4.8           26,830      3.5
Income from IP agreements               -        -          (14,412)    (2.4)                -        -
Provision for export
compliance settlement              6,000      1.0                  -        -                -        -
Restructuring and related
costs                             28,694      5.0            10,490      1.7            4,059      0.5
Operating income                  13,460      2.3             3,705      0.6           80,664     10.6
Interest income                      190      0.0               538      0.1            2,667      0.4
Interest expense and fees         (2,091)    (0.4)          (12,829)    (2.1)         (14,499)    (1.9)
Loss on extinguishment of
debt                                    -        -                 -        -          (8,399)    (1.1)
Gain (loss) on deferred
compensation investments,
net                                1,452      0.3               920      0.1             (457)    (0.1)
Gain (loss) on investments           866      0.2                  -        -          (6,547)    (0.9)
Income (loss) before income
taxes                             13,877      2.4            (7,666)    (1.3)          53,429      7.0
Income tax expense (benefit)      11,022      1.9            29,983      4.9          (13,735)    (1.8)
Net income (loss)            $      2,855     0.5  %   $    (37,649)    (6.2) %   $     67,164     8.8  %

Revenue, Cost of Revenue and Gross Margin

Revenue

Our three end markets are industrial & infrastructure, personal computing and
consumer. Our revenue by end market was as follows ($ in thousands and % of
revenue)



                                     2013                      2012                      2011
Industrial & infrastructure  $    339,418    59.0  %   $    346,844    57.1  %   $    402,439    52.9  %
Personal computing               118,222     20.6          141,345     23.2          191,472     25.2
Consumer                         117,555     20.4          119,675     19.7          166,579     21.9
Total                        $    575,195   100.0  %   $    607,864   100.0  %   $    760,490   100.0  %

Our revenue for fiscal 2013 was $575.2 million, a decrease of $32.7 million or 5.4% from 2012. Revenue in the industrial & infrastructure market and consumer market decreased slightly from fiscal 2012 by 2.1% and 1.8% respectively while revenue in the personal computing market decreased 16.4%. In the industrial & infrastructure market, growth in products targeted at the automotive market was offset by decline in revenue from products targeted at the security market. The decrease in revenue from the personal computing market was due to unfavorable PC trends and our reduced market share in the next generation Intel-based PC platforms.

In aggregate, lower overall unit demand in 2013 decreased revenue by $12.5 million from 2012 levels and a decrease in average selling price ("ASPs") for the related product mix decreased revenue from 2012 levels by $20.2 million. Of this revenue decrease, $39.0 million came from our sales to customers in the Asia/Pacific region, offset by an increase of $5.4 million from sales to customers in North America and $1.0 million from sales to customers in Europe and other countries.


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Our revenue for fiscal 2012 was $607.9 million, a decrease of $152.6 million or 20.1% from fiscal 2011. The fiscal 2012 revenue decrease was primarily due to broad-based declines across all end markets. Revenue in the industrial & infrastructure market decreased 13.8% from fiscal 2011 levels, revenue in the personal computing market decreased 26.2% and revenue in the consumer market decreased 28.2% from fiscal 2011 levels.

In aggregate, lower overall unit demand in 2012 decreased revenue by approximately $138.3 million from 2011 levels and a decrease in ASPs decreased revenue from 2011 levels by approximately $14.3 million. Of this revenue decrease, $117.0 million came from our sales to customers in the Asia/Pacific region, $20.6 million came from sales to customers in North America and $15.0 million came from sales to customers in Europe and other countries.

Geographical revenue ($ in thousands and % of revenue)

                         2013                      2012                      2011
Asia/Pacific     $    435,383    75.7  %   $    474,409    78.0  %   $    591,363    77.8  %
North America         95,703     16.6           90,332     14.9          110,971     14.6
Europe and other      44,109      7.7           43,123      7.1           58,156      7.6
Total            $    575,195   100.0  %   $    607,864   100.0  %   $    760,490   100.0  %

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.

Our gross margin increased by 70 basis points in fiscal 2013 from fiscal 2012. The increase was primarily due to product sales mix changes at the product family level.

Our gross margin decreased by 320 basis points in fiscal 2012 from fiscal 2011. The decrease was primarily due to product sales mix changes at the product family level along with lower production volume when compared to fixed overhead costs charged to cost of revenue.

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 introducing new high-margin products and cost saving opportunities in our manufacturing chain.

Operating Costs and Expenses

Research and Development

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.

Our R&D expenses decreased by 21.8% or $36.3 million to $130.5 million in 2013 compared to $166.9 million for 2012. In the first and third quarters of fiscal 2013, we implemented efforts to refocus our investments in target areas that we believe can sustain high quality revenue growth, reducing our exposure to areas with low returns. The lower R&D expenses in 2013 are primarily the result of reduced headcount and other cost reductions related to our restructuring actions.

Our R&D expenses decreased by 10.0% or $18.6 million to $166.9 million in 2012 compared to $185.5 million for 2011. During the last two quarters of 2011 and throughout 2012, we implemented substantial cost saving initiatives to optimize and integrate acquired companies and to reduce R&D spending. We realigned our resources to focus on our primary future growth drivers while continuing to invest in products aimed at the broad industrial market.


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We believe that a continued commitment to R&D is essential to maintain product leadership and provide innovative new product offerings, and therefore we expect to continue to make significant future investments in R&D. As we continue to move to more advanced process technologies, our mask and engineering wafer costs are becoming more complex and expensive, and will therefore increasingly represent a greater proportion of total R&D expenses.

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, legal, executive and other administrative functions.

Our SG&A expenses decreased by 15.6% or $21.0 million to $113.3 million in 2013 compared to $134.3 million for 2012. The decrease in 2013 was primarily due to lower labor costs related to our restructuring activities in fiscal 2013 and stricter spending controls.

Our SG&A expenses decreased by 4.3% or $6.0 million to $134.3 million in 2012 compared to $140.3 million for 2011. The decrease in 2012 was primarily due to lower labor costs.

Amortization of Purchased Intangibles

Our amortization of purchased intangibles was $24.6 million in 2013, $29.2 million in 2012 and $26.8 million in 2011. The decrease in 2013 was primarily due to certain intangibles that became fully amortized during 2012 and 2013 and the write-off of certain intangible assets to restructuring and related cost during the second quarter of fiscal 2013. The increase in fiscal 2012 from fiscal 2011 was primarily due to additional amortization on in-process R&D projects acquired from Techwell, Inc. ("Techwell") and completed during the first quarter of 2012.

Income from Intellectual Property Agreements

Income from intellectual property agreements was $14.4 million, net of costs, in fiscal 2012 and relate to a $13.4 million settlement of a trade secret misappropriation and patent infringement dispute with another semiconductor company and a $1.0 million sale of several patents.

Provision for Export Compliance Settlement

We recorded a provision of $6.0 million during fiscal 2013 related to alleged violations associated with ITAR proceedings. See Note 18 to our consolidated financial statements.Restructuring and Related Costs

Our restructuring and related costs were $28.7 million in fiscal year 2013, $10.5 million in fiscal year 2012, and $4.1 million in fiscal year 2011 The 2013 restructuring charges consisted primarily of severance costs and lease exit costs and were part of efforts to better align our operating expenses with strategic growth areas for the purpose of improving competitiveness and execution across our business, realign our internal fabrication operations with existing requirements, prioritize our sales and development efforts, strengthen financial performance and improve cash flow. The 2012 and 2011 restructuring charges consisted primarily of severance costs and were part of our ongoing efforts to optimize operations and conclude the integrations of certain acquired companies.

Other Income and Expenses

Interest Income

Our interest income decreased to $0.2 million in fiscal 2013 compared to $0.5 million in fiscal 2012 and $2.7 million in fiscal 2011. Interest income decreased in fiscal years 2013 and 2012 due to decreased average cash and investment balances and continued low interest rates. During the fourth quarter of fiscal 2011, we sold our remaining auction rate securities ("ARS").


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Interest Expense and Fees

Our interest expense and fees decreased to $2.1 million in 2013 compared to $12.8 million in 2012 and $14.5 million in 2011. Included in 2012 interest expense is approximately $5.8 million reclassification of losses on settlement of our interest rate swaps, previously recorded as unrealized loss in other comprehensive income. Excluding these losses, interest expense and fees in 2013 and 2012 decreased from 2011 levels due to lower long-term debt balances.

Loss on Extinguishment of Debt

During the year ended December 30, 2011, we extinguished the remaining portion of our $300.0 million six-year term loan facility 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 $11.6 million in mutual fund investments and corporate owned life insurance under the plan. Changes in the fair value of the asset are recorded as a gain (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 (benefit) is substantially offset by the gains and losses on the investment. During fiscal years 2013 and 2012, we recorded gains on deferred compensation investments of $1.5 million and $0.9 million respectively and compensation expense of $1.7 million and $1.1 million respectively. During fiscal 2011, we recorded a loss on deferred compensation investments of $0.5 million and a decrease in compensation expense of $0.1 million.

Gain (Loss) on Investments

We recognized a gain of $0.9 million in fiscal 2013 related to the recovery of previously recognized losses on ARS. During fiscal 2011, we sold our remaining portfolio of ARS for a net loss of $6.5 million.

Income Tax Expense (Benefit)

Our income tax expense was $11.0 million for 2013 compared to an income tax expense of $30.0 million in 2012. Income tax for fiscal 2013 included a $2.1 million non-deductible charge related to alleged export violations from 2005 to 2010 with ITAR. Income tax for fiscal 2013 also included benefit of $5.7 million relating to the 2012 federal R&D tax credit which was retroactively reinstated on January 2, 2013, with the enactment of the American Taxpayer Relief ACT of 2012 as well as tax expense of $3.3 million related to tax deficiencies in share based compensation. Excluding these items, the effective tax rate differs from the 35% statutory corporate tax rate primary due to losses in foreign jurisdictions with lower statutory tax rates and permanent non-deductible items, such as stock based compensation associated with our cost sharing arrangement.

Our income tax expense was $30.0 million for fiscal 2012 compared to an income tax benefit of $13.7 million in fiscal 2011. Income tax expense for fiscal 2012 included a $16.8 million charge related to a transfer pricing tax election to repatriate cash in connection with the IRS audit of tax years 2005-2007 and 2008-2009. Excluding these unusual items, the effective tax rate was further increased due to the expiration of the federal R&D tax credit and a greater portion of income in higher tax jurisdictions. Income tax expense (benefit) for fiscal 2011 included a benefit of $10.9 million primarily related to the re-measurement of our unrecognized tax benefits and a tax benefit of $9.7 million related to incremental prior year federal and state R&D credits net of a valuation allowance on the state portion of these credits.


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During fiscal year 2013, we reached final settlement with the IRS in connection with the 2008 - 2009 examination periods. The settlement primarily related to transfer pricing adjustments on the outbound pricing of tangible goods and our cost share arrangement with our Malaysia subsidiary. The settlement resulted in a $23.4 million reduction in unrecognized tax benefits ("UTBs"), which was a component of income taxes payable, comprised of a cash payment of $7.5 million to the IRS and a $15.9 million decrease in deferred tax assets related federal R&D tax credits, federal alternative minimum tax ("AMT") tax credits, and federal net operating loss ("NOL") tax attributes. The $7.5 million cash payment consisted of $6.7 million of additional tax due and $0.8 million of interest. We further reduced the UTB balance by $1.2 million for amended returns filed with the state authorities related to the IRS examination settlement. The sum of these items reduced our UTBs by $24.6 million. In connection with the transfer pricing adjustments for the 2008 - 2009 exam periods, we made an election under
Section 4 of Revenue Procedure 99-32, 199-2 C.B. 296. This election will allow us to repatriate cash to the U.S. group to the extent of the transfer pricing adjustments agreed to in the settlement, through the establishment of a deemed account receivable from the controlled foreign corporations ("CFCs"). We estimate this election will provide an additional $125.0 million of cash to repatriate to the U.S., of which we repatriated $12.5 million during the quarter ended January 3, 2014.

During fiscal year 2012, we reached a settlement with the IRS in connection with the 2005 - 2007 examination periods. The settlement primarily related to transfer pricing adjustments on the outbound pricing of tangible goods and the valuation of intangible property sold to our CFC. The settlement resulted in a $57.6 million reduction in UTBs, which was a component of income taxes payable, comprised of a cash payment of $46.6 million to the IRS and an $11.0 million decrease in deferred tax assets related federal R&D tax credits. The $46.6 million cash payment consisted of $34.2 million of additional tax due, $11.8 million of interest and $0.6 million of penalties. We further reduced the UTB balance with a $6.0 million payment to the state authorities related to the IRS examination settlement. The sum of these items reduced our UTBs by $63.6 million. In connection with the transfer pricing adjustments for the 2005 - 2007 exam periods, we made an election under Section 4 of Revenue Procedure 99-32, 199-2 C.B. 296. This election allowed us to repatriate cash to the U.S. group to the extent of the transfer pricing adjustments agreed to in the settlement, through the establishment of a deemed account receivable from the CFCs. We recorded an $11.7 million discrete tax charge to income tax expense and increased income taxes payable, of which $7.4 million was a component of our UTBs, for interest based on the election. We repatriated $162.3 million of cash during fiscal 2012 related to the settlement.

As a global company, our effective tax rate is highly dependent upon the geographic composition of worldwide earnings and tax regulations. We are subject to income taxes in the United States and many foreign jurisdictions and significant judgment is required to determine worldwide tax liabilities. Our effective tax rate, as well as our actual taxes payable, could be adversely affected by changes in the mix of earnings between countries with differing tax rates. Our primary foreign operations are in Malaysia where we currently have a tax holiday resulting in a tax rate of 0%. This tax holiday began on July 1, 2009 and terminates on July 1, 2019. In order to retain this holiday in Malaysia, we must meet certain operating conditions, including compliance with warehouse and shipping quotas and specified manufacturing activities in Malaysia. Absent such tax incentives, the corporate income tax rate in Malaysia that would otherwise apply to us would be 25%. If we cannot or elect not to comply with these conditions, we could lose the related tax benefits. In such event, we may be required to modify our operational structure and tax strategy. Any such modified structure or strategy may not be as beneficial as the benefits provided under the present tax concession arrangement.

The impact of income earned in foreign jurisdictions being taxed at rates different than the United States federal statutory rate was an expense of $3.5 million and an increase on the effective tax rate of 25.3% for the year ended January 3, 2014, compared to an expense of $7.3 million and an increase on the effective tax rate of 97.0% for the year ended December 28, 2012, and a benefit of $16.5 million and decrease on the effective tax rate of 30.9% for the year ended December 30, 2011.In determining net (loss) income, we estimate and exercise judgment in the calculation of tax expense and tax liabilities and in assessing the recoverability of deferred tax assets that arise from temporary differences between the tax and financial statement recognition of assets and liabilities.Temporary differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, establish a valuation allowance. As of January 3, 2014, our net deferred tax asset amounted to $95.3 million compared to $105.5 million as of December 28, 2012.Applicable guidance requires us to record our tax expense based on various estimates of probabilities of sustaining certain tax positions. As a result of this and other factors, our tax expense could be volatile, which contributes to volatility in reported financial results. As of January 3, 2014 and December 28, 2012, our UTBs related to uncertain tax positions were $99.3 million and $112.9 million, respectively.


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Contractual Obligations and Off-Balance Sheet Arrangements

Contractual Obligations and Commitments

The following table sets forth our future contractual obligations as of January
3, 2014 (in thousands):




                                   2014          2015          2016         2017         2018      Thereafter     Total
Future minimum lease
commitments                     $     8,244   $    11,549   $    6,112   $    5,482   $    5,042   $    5,743   $   42,172
Open capital asset purchase
commitments                          1,246              -            -            -            -            -       1,246
Open raw material purchase
commitments                         17,363              -            -            -            -            -      17,363
Tax liability arising from
UTBs                                 9,240        86,836        2,116        1,151             -            -      99,343
Other purchase commitments           4,875         4,679        2,304             -            -            -      11,858
Total                           $    40,968   $   103,064   $   10,532   $    6,633   $    5,042   $    5,743   $  171,982

Our future minimum lease commitments consist primarily of leases for buildings and other real property. Open capital asset purchase commitments primarily include leasehold improvements, production equipment for the expansion of our Palm Bay facility, and other equipment. Open raw material purchase commitments are for externally produced wafers and includes minimum purchase requirements as part of a guaranteed capacity agreement with one of our wafer suppliers. The UTBs relate primarily to the intercompany pricing of goods and services between different tax jurisdictions and are recorded within income taxes payable on our consolidated financial statements.

Off-Balance Sheet Arrangements

As of January 3, 2014 , we did not have any off-balance sheet arrangements, as defined under SEC Regulation S-K Item 303(a)(4)(ii).

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 January 3, 2014, approximately $141.4 million of our cash and cash equivalents and short-term investments was held by our foreign subsidiaries. We have provided for federal and state taxation at approximately 37.5% in connection with the Revenue Procedure 99-32 election related to the 2008-2009 IRS examination periods which allows for the repatriation of $125.0 million. During fiscal 2013, we repatriated $12.5 million of this amount. Therefore, $112.5 million of our cash and cash equivalents held by our foreign subsidiaries as of January 3, 2014 would not be subject to further taxation upon repatriation. As of January 3, 2014, we have $325.0 million of borrowing capacity under our five-year revolving credit facility (the "Facility"). The Facility matures on September 1, 2016 and is payable in full upon maturity. Under the Facility, $25.0 million is available for the issuance of standby letters of credit, $10.0 million is available as swing line loans and $50.0 million is available for multicurrency borrowings. Amounts repaid under the Facility may be re-borrowed. The Facility currently bears interest at 1.75% over one-month LIBOR but is variable based on our leverage ratio as described in the credit agreement in Exhibit 10.1. As of January 3, 2014, we were in compliance . . .

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