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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

(Mark One)

 

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

For the fiscal year ended January 2, 2015

OR

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

For the transition period from ___ to ___

Commission file number 000-29617

INTERSIL CORPORATION

(Exact name of Registrant as specified in its charter)

 

 

Delaware

59-3590018

State or other jurisdiction of

incorporation or organization

(I.R.S. Employer

Identification No.)

 

 

1001 Murphy Ranch Road Milpitas, California

95035

(Address of principal executive offices)

(Zip Code)

 

 

Registrant’s telephone number, including area code

408-432-8888

 

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange on which registered

Class A Common Stock, par value $0.01 per share

The NASDAQ Stock Market LLC

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [x] Yes   [ ] No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [ ] Yes   [ x] No

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. [x] 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 that the registrant was required to submit and post such files). [x] Yes   [ ] No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Large accelerated filer [x]

Accelerated filer [ ]

Non-accelerated filer [ ] (Do not check if a smaller reporting company)

Smaller reporting company [ ]

 

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

The aggregate market value of our Class A Common Stock, par value $0.01 per share, held by non-affiliates (based upon the closing sale price of $15.38 on the Nasdaq Global Select Market) on July 4, 2014 was approximately $2.0 billion.

As of February 9, 2015, there were 130,506,137 shares of our Class A Common Stock, par value $0.01 per share, outstanding.

The information required by Part III of this Annual Report on Form 10-K, to the extent not set forth herein, is incorporated by reference from the Registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 24, 2015.

 

 

 

 

 


 

INTERSIL CORPORATION

FORM 10-K

January 2, 2015

TABLE OF CONTENTS

 

 

 

 

PART I 

Item 1.

Business

Item 1A.

Risk Factors

Item 1B.

Unresolved Staff Comments

17 

Item 2.

Properties

17 

Item 3.

Legal Proceedings

17 

Item 4.

Mine Safety Disclosures

17 

 

 

 

 

PART II

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

17 

Item 6.

Selected Financial Data

20 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

30 

Item 8.

Financial Statements and Supplementary Data

31 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

64 

Item 9A.

Controls and Procedures

64 

Item 9B.

Other Information

65 

 

 

 

 

PART III

 

Item 10.

Directors, Executive Officers and Corporate Governance

65 

Item 11.

Executive Compensation

66 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

66 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

66 

Item 14.

Principal Accounting Fees and Services

66 

 

 

 

 

PART IV

 

Item 15.

Exhibits, Financial Statement Schedules

67 

 

 

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PART I

Item 1.Business.

Forward Looking Statements

This Annual Report on Form 10-K 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, and other safe harbors under the Securities Act of 1933 and the Securities Exchange Act of 1934. Forward-looking statements are not statements of historical fact and generally can be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “goals,” “intends,” “may,” “plans,” “predicts,” “projects,” “targets,” “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.” Readers are cautioned that these forward-looking statements are based on current predictions, 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. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Risk Factors” in Part I, Item 1A of this report. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document except to the extent required by law.

Our web address is www.intersil.com. We post all Securities and Exchange Commission (“SEC”) filings on our website, including our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, the filings of our officers and directors pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our proxy statements on Schedule 14A related to our annual shareholders’ meeting and any amendments to these reports or statements filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act.

We have adopted a Corporate Code of Ethics, which is available on our website. The content on any website referred to in this filing is not incorporated by reference into this filing unless expressly noted otherwise.

The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. You may also read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549 and may obtain information on the operation of the Public Reference Room by calling the SEC at (202) 551-8090.

Company Overview

We design and develop innovative power management and precision analog integrated circuits. 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 infrastructure, industrial, automotive, consumer and computing markets. We supply a full range of power IC solutions for battery management, processor power management, and display power management, including power regulators, converters and controllers as well as fully integrated power modules. We also provide precision analog components such as amplifiers and buffers, proximity and light sensors, data converters, optoelectronics, video decoders and interface products. As a major supplier of radiation-hardened devices 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.

Business Strategy

In fiscal 2013, we refocused our strategy to target the $10 billion power management opportunity. We aligned our resources accordingly, aiming our diverse portfolio at markets where our unique capability and the size of the opportunity will enable sustained growth. We are investing our research and development (“R&D”) resources in next-generation solutions that expand our offerings in these target markets, leverage our differentiated technology and offer significant competitive advantages. We are focused in three main areas:

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Expand our presence in power management for industrial and infrastructure applications. Our advanced analog and digital power management products position us to benefit from growth in data centers, communications infrastructure build-outs and a continued trend towards improved energy efficiency across industrial applications.

Establish leadership in power management for mobile applications. Our heritage in computing, our unique modulation capability and established relationships with the leading suppliers of mobile devices are driving a comprehensive strategy to target the explosive growth in the mobile computing market.

Extend our leadership in target applications in the automotive and aerospace markets. We have recognized capability and market leadership in radiation hardened commercial satellite applications. We also have a growing presence in both video and power applications targeted at the automotive market.

 

Products and Technology

We have a number of core technologies that allow us to deliver differentiated products to the market place. These products address opportunities we divide into three market categories: Industrial and Infrastructure, Consumer and Computing markets.

Industrial & Infrastructure

Industrial & infrastructure products represented 63.7% of revenue during fiscal year 2014. The largest components of this revenue are products for power, automotive, aerospace, and broad-line industrial applications. Power products include many of our most promising industrial and infrastructure products – digital power controllers, modules and switching regulators as well as other general purpose power devices. In automotive we are targeting both infotainment and power applications. Our video decoders form a primary building block for console displays and rear view camera display that are becoming a common safety feature in mid- to high-end vehicles. We are applying our power management technology to address the growing market for electric vehicles. Our radiation-hardened products offer advantages for the most rigorous applications, including commercial aerospace, and make up another large component of the company’s industrial revenue. Our computing heritage has resulted in a leading suite of products for analog and digital power management addressing the rapid expansion of cloud computing and communications infrastructure. Our products in this category also enable multiple functions in hundreds of other industrial systems from factory automation to test and measurement equipment.

Consumer

Consumer products represented 15.5% of revenue during fiscal year 2014. This is the most competitive of our end markets and is characterized by high volumes and short life cycles. We have proven over the years that our technology leadership particularly in power management and optical sensors can enable us to win designs in the industry’s highest profile consumer devices. As we continue to develop higher value and more integrated solutions for the consumer market, we believe we can maintain a strong presence among the most innovative consumer electronics customers.

Computing

Computing power management products represented 20.8% of revenue during fiscal year 2014. Our products provide the power management functions for all types of personal computers, including ultrabooks®, notebooks and desktops. These functions include power management for the central processing unit (“CPU”), battery charging, display power and other types of power-related functions within a personal computer.

The traditional personal computer (“PC”) market has been in decline and will continue to decline as mobile devices become more capable and affordable. We intend to leverage our core intellectual property (“IP”) and strong relationships in the PC market to introduce products directed at both high-end servers for cloud computing and integrated power for mobile consumer devices while continuing to develop next generation power management products for the evolving mobile PC market.

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Geographic Financial Summary

We operate exclusively in the semiconductor industry and primarily the power management and high-performance analog sector of that industry. Substantially all revenue results from the sale of semiconductor products. All intercompany revenue and balances have been eliminated in the consolidated results.  Revenue is based on the geographic location of the distributors, original equipment manufacturers or contract manufacturers who purchased our products, which may differ from the geographic location of the end customers.

A summary of the operations by geographic area is below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

2014

 

2013

 

2012

United States operations

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

101,268 

 

 

$

90,348 

 

 

$

85,356 

 

Tangible long-lived assets

$

55,681 

 

 

$

59,469 

 

 

$

54,048 

 

International operations

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

461,287 

 

 

$

484,847 

 

 

$

522,508 

 

Tangible long-lived assets

$

16,591 

 

 

$

22,398 

 

 

$

31,326 

 

 

We market our products for sale to customers, including distributors, primarily in China, the U.S., South Korea, Japan, Germany, Singapore, and Taiwan. A summary of percentage of revenue by country is shown below and shows countries where values exceeded 10% in any one year presented:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

2014

 

2013

 

2012

Revenue by country

 

 

 

 

 

 

 

 

 

 

 

China

 

50.9 

%

 

 

52.9 

%

 

 

55.4 

%

United States

 

18.1 

%

 

 

15.7 

%

 

 

14.0 

%

 

One distributor, Avnet, Inc. (“Avnet”), represented 18.4%, 17.0%, and 14.9% of revenue during fiscal years 2014, 2013,  and 2012 respectively and 24.4% and 24.6% of trade receivables as of January 2, 2015 and January 3, 2014, respectively. Another distributor, WPG Holdings Ltd. (“WPG”), represented 10.8%, 12.2%, and 12.8% of revenue during fiscal years 2014, 2013,  and 2012 respectively and 7.7% and 13.8% of accounts receivable as of January 2, 2015 and January 3, 2014, respectively. 

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Sales, Marketing and Distribution

We sell our products through our direct sales force and a network of distributors. Our sales team focuses on those major accounts that are strategic to our marketing and product strategies. Our direct geographical sales organizations sell products in regions throughout the world. The geographical sales force works closely with a network of distributors, value-added resellers and manufacturers’ representatives, creating a worldwide selling network. Dedicated direct sales organizations operate in North American, European, Japanese and Asia/Pacific markets. We strategically locate sales offices near major original equipment manufacturers (“OEMs”), original design manufacturer (“ODMs”) and contract manufacturers throughout the world. Our technical applications organization is deployed alongside the direct sales force, which helps ensure our focus on both applications as well as products and customers. Our dedicated marketing organization supports field sales and is aligned by specific product group.

Distributors and value-added resellers handle a wide variety of products, including products sold by other companies that compete with our products. Most of our distributor agreements allow for protection from market price fluctuations and/or the right to return some unsold products. Some of our distribution agreements contain an industry-standard stock rotation provision allowing for minimum levels of inventory returns or scrap. In fiscal 2014 and 2013, we derived 58.3% and 60.4% of our revenue through distributors and value-added resellers, respectively.

Our sales organization is supported by customer service and logistics organizations throughout the world. Product orders flow to our fabrication facility or to foundries where the semiconductor wafers are made. Most of our semiconductors are assembled and tested at the facilities of independent subcontractors. Finished products are then shipped to customers either indirectly via third-parties or directly via company-managed warehouses.

Research and Development 

We believe that the continued introduction of new products in our target markets is essential to our growth. R&D expenses were $125.9 million, $130.5 million and $166.9 million in fiscal 2014, 2013 and 2012, respectively. We believe that we must continue to innovate, enhance and expand our products and services to maintain our leadership position, and we intend to achieve this through in-house R&D, licensed technology and selective acquisitions. As of January 2, 2015, we had 463 employees engaged in R&D.

Manufacturing

Our products utilize ICs manufactured using silicon wafers. Our business is dependent upon reliable fabrication, packaging and testing of these wafers. We have wafers of ICs manufactured by leading foundry suppliers such as Global Foundries, IBM Microelectronics, Taiwan Semiconductor Manufacturing Company, and United Microelectronics Corporation. We also fabricate wafers of ICs in our Florida manufacturing facility.  During fiscal 2014, we internally produced 13.1% of our wafers and outsourced the remaining 86.9% to our foundry partners. 

Following fabrication, wafers are subject to packaging and testing processes. The majority of these processes are performed by independent subcontractors located in Malaysia, Taiwan, China and Philippines. However, we maintain internal assembly and test capabilities for certain products in Florida.

While we have not experienced any significant delay in obtaining raw materials,  our reliance on foundry suppliers for silicon wafers, the building block of our products, is critical and the relative importance of this part of the supply chain continues to increase, increasing our risk of incurring a production-limiting shortfall. As is typical in the industry, we must allow for significant lead times in delivery of certain materials. The production of ICs, from wafer fabrication through packaging and final testing, may take from eight to sixteen weeks. We manufacture thousands of product types and our customers often require delivery within a short period of time following their order. To consistently meet these requirements, we maintain a substantial work-in-process and finished goods inventory. Manufacture, assembly and testing of ICs is a complex process. Normal risks include errors and interruptions in the production process, defects and shortages in raw materials, disruptions at supplier locations, unexpected demand, as well as other risks, all of which can have an unfavorable impact to production costs, gross margins and our ability to meet customer demand.

Backlog

Our product 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

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current customer request date (“CRD”) for standard products and ninety days prior to 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 fall 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. The majority of our backlog for sales to distributors is valued at list price, which can be substantially higher than the prices ultimately recognized as revenue. Considering these practices and our experience, backlog alone cannot be consistently relied on to predict actual revenue for future periods.

Our six month backlog as of January 2, 2015, was $157.9 million compared to the six-month backlog as of January 3, 2014, of $127.7 million.

Seasonality

The consumer and computing markets have historically experienced weaker demand in the first half of the year than in the second half of the year in the semiconductor industry.

Competition

The power management and high-performance analog market is extremely competitive. We compete in our target markets with many companies that may have significantly greater resources than us, including but not limited to Analog Devices, Linear Technology, Maxim Integrated Products, ON Semiconductor, and Texas Instruments. We compete on the basis of key intellectual property that enables advantages in technical performance, product features, customized design, price, availability, quality, reliability, sales and/or technical support.

Trademarks and Patents

We own rights in trademarks, trade secrets, and patents that are important to our business. Intersil procures trademark rights through registration applications or trademark usage. We use trademarks to identify Intersil products and build brand awareness, including through periodic advertising. We seek to maintain our trade secrets through security measures, policies and the use of confidentiality agreements. We also file patent applications to secure exclusive patent rights to potentially valuable inventions in the United States and in select foreign countries where we believe filing for such protection is appropriate. We may, however, elect, in certain cases, not to seek patent protection for potentially valuable inventions, if we determine other protection, such as maintaining the invention as a trade secret, to be more advantageous. The expiration dates of our patents range from 2015 to 2033. While our patents, trademarks and trade secrets benefit us, we believe that our competitive position and future success is largely determined by other factors including our innovative skills, technical expertise, and management ability; the success of new products being developed by us; and customer support.

Employees

Our worldwide workforce consisted of 1,031 employees as of January 2, 2015. None of our employees are subject to a collective bargaining agreement.

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Environmental Matters

We believe that our operations are substantially in compliance with applicable environmental requirements. Our costs and capital expenditures to comply with environmental regulations have been immaterial during the last three years. However, we are subject to numerous federal, state and international environmental laws and regulatory requirements. From time to time, we become involved in investigations or litigations of various potential environmental issues concerning activities at our facilities or former facilities or remediation as a result of past activities (including past activities of companies we have acquired). Further, we may receive notices from the U.S. Environmental Protection Agency or equivalent state or international environmental agencies that we are a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act (commonly known as the “Superfund Act”) and/or equivalent laws. Such notices assert potential liability for cleanup costs at various sites, which may include sites owned by us, sites we previously owned and treatment or disposal sites not owned by us, allegedly containing hazardous substances attributable to us from past operations. While it is not feasible to predict the outcome of many of these proceedings, in the opinion of our management, any payments we may be required to make as a result of such claims in existence will not have a material adverse effect on our financial condition, results of operations or cash flows. To the extent any known contamination was caused prior to August 1999, we are indemnified against any associated environmental liabilities. This indemnification does not expire, nor does it have a maximum amount.

Item 1A.Risk Factors.

You should carefully consider and evaluate all of the information in this Annual Report on Form 10-K, including the risk factors listed below. In addition to these risks, other risks not now known to us or that we currently deem immaterial may also impair our business operations. If any of these risks occur, our business could be materially harmed. If our business is harmed, the trading price of our Class A common stock could decline.

As discussed in “Forward Looking Statements” in Item 1 above, this Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward looking statements, including as a result of the risks described in the cautionary statements in this “Risk Factors” section and elsewhere in this Annual Report on Form 10-K, in our other filings with the SEC, and in material incorporated by reference. We undertake no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Global economic conditions and uncertainty, as well as the highly cyclical nature of the semiconductor industry, could adversely affect our revenue, operating results, cash flows, collectability of accounts receivable and supplier relationships, and our ability to access capital markets.

Adverse global economic conditions have from time to time caused or exacerbated significant slowdowns in the semiconductor industry generally, as well as in our end markets, which adversely affected our business and results of operations. In recent periods, market and business conditions in general have been adversely affected by investor and customer concerns about the global economic outlook, including concerns about the rate of global economic recovery.  This uncertainty poses a risk as consumers and businesses may postpone spending in response to negative financial news and/or declines in income or asset values, which could have a material negative effect on the demand for our products and services.

 Our operations and performance depend significantly on worldwide economic conditions, in which significant uncertainty currently exists. This uncertainty poses a risk as consumers and businesses may postpone spending in response to negative financial news and/or declines in income or asset values, which could have a material negative effect on the demand for our products and services.

The semiconductor industry is highly cyclical. The semiconductor industry has experienced significant downturns, often in connection with product cycles of both semiconductor companies and their customers, but also related to declines in general economic conditions. These downturns have been characterized by volatile customer demand, high inventory levels and accelerated erosion of average selling prices. Any future economic downturns could materially and adversely affect our business from one period to the next relative to demand and product pricing. In addition, the semiconductor industry has experienced periods of increased demand, during which we may experience internal and external manufacturing constraints. We may experience substantial changes in future operating results due to the cyclical nature of the semiconductor industry.

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We may not be able to compete successfully in the highly competitive semiconductor industry. 

The semiconductor industry is intensely competitive and many of our direct and indirect competitors have substantially greater financial, technological, manufacturing, marketing and sales resources. The current level of competition in the semiconductor market is high and may increase in the future. We currently compete directly with companies that have developed similar products, including but not limited to,  Analog Devices, Linear Technology, Maxim Integrated Products, ON Semiconductor, and Texas Instruments. We also compete indirectly with numerous semiconductor companies that offer products based on alternative solutions. These direct and indirect competitors are established, multinational semiconductor companies as well as emerging companies. Our ability to compete successfully in the rapidly evolving and increasingly more complex area of IC technology depends on several factors, including:

success in designing and manufacturing new products that implement new technologies;

ability to hire, retain and motivate adequate numbers of engineers and other qualified employees;

protection of our proprietary products, processes, trade secrets and know-how;

maintaining high product quality and reliability;

pricing policies of our competitors;

performance of competitors’ products;

ability to deliver in large volume on a timely basis;

marketing, manufacturing and distribution capability; and

financial strength.

To the extent that our products achieve market success, competitors typically seek to offer competitive products or lower prices, which, if successful, could harm our business and adversely impact our results of operations.

Our ability to maintain or expand our business depends on the successful development and market acceptance of new products

We operate in a dynamic environment characterized by intense competition, rapid technological change, evolving standards, short product life cycles and continuous erosion of average selling prices. Consequently, our future success will be highly dependent upon our ability to continually develop new products using the latest and most cost-effective technologies, introduce our products in commercial quantities to the marketplace ahead of the competition and have our products selected for inclusion in leading system manufacturers' products. The development of new products will continue to require significant R&D expenditures. 

The introduction of new products presents significant business challenges because product development commitments and expenditures must be made well in advance of the related revenues. The success of a new product depends on accurate forecasts of long-term market demand, future technological developments and a variety of specific implementation factors, including:

timely and efficient completion of process design and development;

timely and efficient implementation of manufacturing and assembly processes;

product performance;

the quality and reliability of the product; and

effective marketing, sales and service.

If we are unable to successfully execute these elements of new product development our future results of operations could be adversely affected.

Our competitiveness and future success depend on our ability to achieve design wins for our products with current and future customers and introduce new or improved products that meet customer needs while achieving favorable margins. A failure to develop, produce and market products in a timely manner, or to achieve market acceptance for these products, could have a variety of negative effects on our competitive position and our financial results, such as reducing our revenue, increasing our costs, lowering our gross margin percentage, and ultimately leading to impairment of assets.

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A downturn in the computing end-market could cause a reduction in demand for our products and limit our ability to maintain revenue levels and operating results.

A significant portion of our revenue (20.8%, 20.6% and 23.2% in fiscal 2014, 2013 and 2012 respectively) is derived from customers participating in the computing end-market. Any deterioration in this end market or our inability to compete for new solutions within the computing end market could lead to a reduction in demand for our products which could adversely affect our revenue and results of operations.

The consumer end market is characterized by rapid product obsolescence and requires that we develop and produce our products at the right time for our customers to fulfill demand for products in the consumer end market. If we are unable to forecast demand for our products, or we are unable to make and deliver products in a timely manner, our financial condition and results may be adversely affected.

In fiscal 2014, we derived 15.5% of our revenue from the consumer end market. This is the most competitive of our end markets and is characterized by high volumes, short life cycles and rapidly changing market requirements, products and customer demand. Our success in this market will depend principally on our ability to:

predict technology and market trends;

develop products on a timely basis; and

meet the market windows for consumer products;

 

If we are unable to consistently perform the foregoing activities, our consumer business may not be able to sustain or grow revenues in the consumer end market.

In addition, sudden changes in customer demand requirements, order cancellations or delay in product shipments to consumer end market customers could materially and adversely affect our revenues and results of operations.  

We depend on third-party suppliers, located around the world for raw materials and manufacturing services to manufacture our products, which can result in supply disruptions, sudden cost increases and delays beyond our control in delivering the products to our customers.

Production time and the cost of our products could increase if we were to lose one of our suppliers or if one of those suppliers increased the prices of raw materials. Our operating results could be adversely affected if we were unable to obtain adequate supplies of raw materials in a timely manner or if the costs of raw materials increased significantly. Our manufacturing operations depend upon obtaining adequate supplies of raw materials on a timely basis. We purchase raw materials, such as silicon wafers, from a limited number of suppliers on a just-in-time basis. From time to time, suppliers may extend lead times, limit supplies or increase prices due to capacity constraints or other factors. 

We use both internal wafer fabrication facilities and third-party wafer fabrication suppliers in manufacturing our products. We intend to continue to rely on third-party suppliers and other specialist suppliers for most of our manufacturing requirements. Many of these third-party suppliers are not obligated to supply products to us for any specific period, in any specific quantity or at any specific price. As a result, we cannot directly control semiconductor delivery schedules, which could lead to product shortages, quality assurance problems and increases in the cost of our products. We may experience delays and we cannot be sure that we will be able to obtain semiconductors within the time frames and in the volumes required by us at an affordable cost or at all. Any disruption in the availability of wafers and other semiconductor materials or any problems associated with the delivery, quality or cost of the fabrication, assembly and testing of our products could significantly hinder our ability to deliver our products to our customers and may result in a decrease in sales of our products. If the third-party suppliers we use are unable to provide our products, we may be required to seek new suppliers and we cannot be certain that their services will be available at favorable terms or that sufficient capacity will be available within a reasonable time period.

In addition, the manufacture of our products is a highly complex and precise process, requiring production in a highly controlled environment. Changes in manufacturing processes or the inadvertent use of defective or contaminated materials by a third-party supplier could adversely affect their ability to achieve acceptable manufacturing yields and product reliability. If our suppliers do not achieve adequate yields or product reliability, our customer relationships could suffer. This could ultimately lead to a loss of sales of our products and have a negative effect on our reputation, business, financial condition and/or results of operations.  Additionally, our

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contract manufacturers may decide to discontinue operations at a particular location or altogether, which will cause us to transfer those manufacturing operations elsewhere, which could disrupt the supply of products.

Delays in production at new facilities, in implementing new production techniques or in curing problems associated with technical equipment malfunctions may lower yields and reduce our revenues and profitability.

Our manufacturing processes are very complex, require advanced and costly equipment and are continuously modified to improve yields and product performance. Impurities or other difficulties in the manufacturing process can lower yields. Our manufacturing efficiency is an important factor in our future profitability and we may not be able to maintain our manufacturing efficiency or increase manufacturing efficiency to the same extent as our competitors.

We may experience difficulty in beginning production at new facilities or in effecting transitions to new manufacturing processes. Resultant delays can be unpredictable and can result in late product deliveries and reduced yields. We may experience manufacturing problems in achieving acceptable yields or experience product delivery delays in the future as a result of, among other things, capacity constraints, construction delays, upgrading or expanding existing facilities or changing our process technologies, any of which could result in a loss of future revenues. Increases in fixed costs and operating expenses related to increases in production capacity may adversely affect our operating results if revenues do not increase proportionately.

If our products contain defects or fail to achieve industry reliability standards, our reputation may be harmed, and we may incur significant unexpected expenses and lose sales opportunities. Our insurance coverage for such events may be insufficient.

Semiconductor products are highly complex and may contain defects when they are first introduced. We generally warrant our products for one year from the date of shipment by us.  If any of our products contain defects, we may be required to incur additional development and remediation costs, pursuant to warranty and indemnification provisions in our terms and conditions of sale or customer contracts.    Our products may contain undetected errors or defects that may:

cause delays in product introductions and shipments;

result in increased costs and diversion of development resources;

cause us to incur increased charges due to obsolete or unusable inventory;

require design modifications; or

decrease market acceptance or customer satisfaction with these products, resulting in product returns, recalls and lost sales.

In addition, we may not find defects or failures timely, which may result in loss or delay in market acceptance and could significantly harm our operating results. Our current or potential customers also might seek to recover from us any losses resulting from defects or failures in our products. Further, such claims might be significantly higher than the revenues and profits we receive from the products involved, as we are usually a component supplier with limited value content relative to the value of a complete system or sub-system. Liability claims could require us to spend significant time and money in litigation or to pay significant damages for which we may have insufficient insurance coverage. Any of these claims, whether or not successful, could seriously damage our reputation and business.

Products we manufacture and sell, or products formerly produced and sold by us and now manufactured and sold by purchasers of business that we have divested, may infringe other parties’ IP rights. We may have to pay others for infringement and misappropriation of their IP rights, suspend the manufacture, use or sale of some affected products, or incur the cost of defending in litigation, resulting in significant expense to us.

The semiconductor industry is characterized by vigorous protection and pursuit of IP rights. We have received, and may receive in the future, notices of claims of infringement and misappropriation of other parties’ proprietary rights. In the event of an adverse decision in a patent, trademark, copyright, mask work or trade secret action, we could be required to withdraw the product or products found to be infringing from the market or redesign products offered for sale or under development. We have, at times, assumed indemnification obligations in favor of our customers that could be triggered upon an allegation or finding of our infringement of other parties’ proprietary rights. We have also, at times, assumed indemnification obligations in favor of the purchasers of businesses that we have divested that could be triggered upon an allegation or finding of infringement of other parties’ proprietary rights by those purchasers.

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These indemnification obligations would be triggered for reasons including the sale or supply of a product that was later discovered to infringe another party’s proprietary rights. Whether or not these infringement claims are successfully asserted, we would likely incur significant costs and diversion of our resources with respect to the defense of these claims. To address any potential claims or actions asserted against us or those we have indemnified, we may seek to obtain a license under a third-party’s IP rights. However, in such an instance, a license may not be available on commercially reasonable terms, if at all. Litigation could result in significant expense to us, adversely affecting sales of the challenged product or technology and diverting the efforts of our technical and management personnel, whether or not the litigation is determined in our favor. In the event of an adverse outcome in any litigation, we may be required to:

 

pay substantial damages, which may include enhanced damages for willful infringement, and incur significant attorneys’ fees;

indemnify customers for damages they might suffer if the products they purchase from us infringe IP rights of others;

indemnify purchasers of businesses that we have divested for damages they might suffer if certain of the products they sell infringe IP rights of others;

stop our manufacture, use, sale or importation of infringing products;

expend significant resources to develop or acquire non-infringing technology;

discontinue the use of some processes; or

obtain licenses to IP rights covering products and technology that may, or may have been found to, infringe or misappropriate such IP rights.

If we or our contract manufacturers suffer loss or significant damage to our factories, facilities or distribution system due to catastrophe,  our operations could be seriously harmed.

Our factories, facilities and distribution system, and those of our contract manufacturers, are subject to risk of catastrophic loss due to fire, flood, earthquake or other natural or man-made disasters. For example, our internal wafer fabrication facility is located on the east coast of Florida. Operations at this facility may experience disruptions during tropical storms and hurricanes. Further, our corporate headquarters is located near major earthquake fault lines in California and we have been unable to obtain earthquake insurance at reasonable costs and limits. A portion of our facilities and those of our contract manufacturers are located in the Pacific Rim region, a region with above average seismic and severe weather activity. Any catastrophic natural disaster in those regions or catastrophic loss or significant damage to any of our facilities or those of our contract manufacturers in those regions would likely disrupt our operations, delay production, shipments and revenue, and could materially and adversely affect our business. Such events could also result in significant expenses to repair or replace our affected facilities, and in some instances could significantly curtail our research and development efforts in a particular product area or target market

We use a significant amount of IP in our business. If we are unable to protect this IP, we could lose our right to prevent others from using our key technologies, resulting in decreased revenues.

We rely on IP rights to protect our technology. Our rights include, but not are limited to, rights existing under patent, trade secret, trademark, mask work and copyright law. Some of our technology is not covered by any patent or patent application, and there are risks that our patents may be invalidated, circumvented or challenged.

Competitors may develop technologies that are similar or superior to our technology, duplicate our technology or design around our patents. In addition, effective patent, trademark, copyright, mask work and trade secret protection may be unavailable, limited or not applied for in certain foreign countries.

We also seek to protect our proprietary technology, including technology that may not be patented or patentable, in part by confidentiality agreements and, if applicable, inventors’ rights agreements with our collaborators, advisors, employees and consultants. We cannot assure that these agreements will always be undertaken or will not be breached or that we will have adequate remedies for any breach.

Some of our current licenses to use others’ technology and IP are scheduled to expire periodically over the next several years, unless extended. We will need to negotiate renewals of these agreements or obtain the technology and IP from alternative sources. We may not be able to obtain alternative technology and IP, or renewals on substantially similar terms as those that currently exist or at all.

The failure to protect our IP, to extend its existing license agreements or utilize alternative technology could adversely affect our revenues.

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We are subject to a variety of domestic and international laws and regulations, including Export Control Regulations, U.S. Customs and the Foreign Corrupt Practices Act

As an exporter, we must comply with various laws and regulations relating to the export of products, services and technology from the U.S. and other countries having jurisdiction over our operations. In the U.S., these laws include, among others, the U.S. Export Administration Regulations (EAR) administered by the U.S. Department of Commerce, Bureau of Industry and Security, the International Traffic in Arms Regulations (ITAR) administered by the U.S. Department of State, Office of Defense Trade Controls Compliance (DTCC), and trade sanctions, regulations and embargoes administered by the U.S. Department of Treasury, Office of Foreign Assets Control. Certain of our products have military or strategic applications and are on the munitions list of the ITAR, or represent so-called “dual use” items governed by the EAR. As a result, these products require individual validated licenses in order to be exported to certain jurisdictions. Any failures to properly classify products or otherwise comply with these laws and regulations could result in civil or criminal penalties, fines, investigations, adverse publicity and restrictions on our ability to export our products, and repeat failures could carry more significant penalties.  Any changes in export regulations may further restrict the export of our products. The length of time required by the licensing processes can vary, potentially delaying the shipment of products and the recognition of the corresponding revenue. Any restrictions on the export of our products or product lines could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

We are also subject to U.S. Customs Regulations and similar laws, which control import of technologies by companies and various other aspects of the operation of our business and the Foreign Corrupt Practices Act and similar anti-bribery laws, which prohibit companies from making improper payments to government officials for the purposes of obtaining or retaining business. While our policies and procedures mandate compliance with such laws and regulations, we can provide no assurance that our employees and agents will always act in strict compliance. Failure to comply with such laws and regulations may result in civil and criminal enforcement, including monetary fines and possible injunctions against shipment of our products or other activities, which could have a material adverse impact on our results of operations and financial condition.

We may not be able to recruit and retain highly skilled personnel.

Our success depends upon our ability to recruit and retain highly-skilled technical, managerial, marketing and financial personnel. Highly-skilled employees are difficult to attract and retain in the highly-competitive semiconductor industry, and the failure to attract and retain such personnel could negatively impact our ability to keep pace with our competitors. Further, we have in the past several years announced certain cost reductions that included reductions in work force. These reductions in personnel, as well as any future cost reduction measures, could negatively impact morale, leading to unintended employee attrition and difficulty in recruiting personnel.

Most of our distributors and value-added resellers can terminate their contract with us with little or no notice. The termination by a distributor or value-added reseller could result in a materially negative impact on our business, including revenue and accounts receivable.

In fiscal 2014, our distributors and value-added resellers accounted for 58.3% of our revenue. Our distributors can terminate their agreement with us with minimal notice. Two distributors accounted for greater than 10% of our revenue in fiscal 2014. The termination of a significant distributor or reseller could impact our revenue and limit our access to certain end-customers. It could also result in the return of excess inventory. Since many distributors simply resell our products, they generally operate on low profit margins. If a distributor or reseller were to terminate their agreement or go out of business, our accounts receivable from them could be subject to collection risk.

Our distribution channels recently have experienced consolidation due to merger and acquisition activity in that business sector. Consolidation may result in our distributors allocating fewer resources to the distribution and sale of our products, which could adversely affect our financial results. At times, our sales are concentrated in a small number of distributors, which are in various international locations and of various financial strengths. Financial difficulties, inability to access capital markets, or other reasons may affect our distributors' performance, which could materially harm our business and our operating results.

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Our financial results may be adversely impacted by higher than expected tax rates, exposure to additional income tax liabilities or adverse outcomes resulting from examination of our income or other tax returns

As a global company, our effective income 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 arrangementIn addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service (“IRS”) and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on our business, financial condition, and results of operations. 

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New regulations related to “conflict minerals” may force us to incur additional expenses, may make our supply chain more complex and may result in damage to our reputation with customers.

Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, the SEC adopted requirements for companies that use certain minerals and metals, known as conflict minerals, in their products, whether or not these products are manufactured by third parties. These requirements require companies to conduct a reasonable country of origin inquiry (“RCOI”) and possibly also conduct due diligence, then disclose and report whether or not such minerals originate from the Democratic Republic of Congo (“DRC”) or adjoining countries. The implementation of these requirements could adversely affect the sourcing, availability and pricing of minerals used in the manufacture of semiconductor devices, including our products. In addition, we will incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. Since our supply chain is complex, we may not be able to sufficiently verify the origins for these conflict minerals used in our products through the RCOI procedures that we implement, which may harm our reputation. In such event, we may also face difficulties in satisfying customers who require that all of the minerals in our products are certified as DRC conflict-free.

Our business, financial condition and results of operations could be adversely affected by the political and economic conditions of the countries in which we conduct business and other factors related to our international operations.

Non-U.S. sales accounted for 81.5% of our revenue in fiscal 2014. We expect that international sales will continue to account for a significant majority of our total revenue in future years. We are subject to various challenges related to the management of global operations, and international sales are subject to risks including, but not limited to:

increases in taxes, tariffs and governmental royalties,

changes in laws and policies governing operations of foreign-based companies,

loss of revenue, equipment and property as a result of expropriation, acts of terrorism, war, civil unrest, boycotts, trade restrictions and other political risks,

unilateral or forced renegotiation, modification or nullification of existing contracts with governmental entities;

difficulties enforcing our rights against a governmental agency because of the doctrine of sovereign immunity and foreign sovereignty over international operations;

currency restrictions and exchange rate fluctuations;

trade balance issues;

differences in our ability to acquire and enforce our IP and contract rights in varying jurisdictions; and

the need for technical support resources in different locations.

Many of the challenges noted above are applicable in China, which is a large and fast growing market for semiconductors and therefore an area of additional and continued growth for our business. As the business volume between China and the rest of the world grows, there is inherent risk, based on the complex relationships between China, Taiwan, Japan, and the United States, that political and diplomatic influences might lead to trade disruptions which would adversely affect our business with China and/or Taiwan and perhaps the entire Asia/Pacific region. A significant trade disruption in these areas could have a material, adverse impact on our future revenue and profits.

Our international operations may also be adversely affected by United States laws and policies affecting foreign trade and taxation. The realization of any of these factors could materially and adversely affect our business, financial condition and results of operations

 

 

 

 

 

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Restrictions in our revolving credit facility may limit our activities.

Our current revolving credit facility may impose restrictions that limit our ability to engage in certain activities including our ability to enter into certain transactions, make investments or other specified restricted payments, pay certain dividends or repurchase our capital stock, create certain liens on our assets and incur certain subsidiary indebtedness. Our credit facility requires us to maintain compliance with specified financial ratios. These covenants could restrict our ability to finance future operations or capital needs, respond to changing business and economic conditions or engage in other transactions or business activities that may be important to our growth strategy or otherwise important to us. Our ability to comply with these financial restrictions and covenants is dependent on our future performance, which is subject to prevailing economic conditions and other factors, including factors that are beyond our control such as foreign exchange rates, interest rates, changes in technology and changes in the level of competition. If we breach any of the covenants under our credit facility or the indenture governing our outstanding notes and do not obtain appropriate waivers, then, subject to applicable cure periods, our outstanding indebtedness, if any, could be declared immediately due and payable. In addition, the lenders under our credit facility could institute foreclosure proceedings against the U.S. assets used to secure the borrowing under such facility.

We are subject to litigation risks.

From time to time, we are subject to legal claims and are involved in a variety of routine legal matters that arise in the normal course of business. We believe it is unlikely that the final outcome of these legal claims will have a material adverse effect on our consolidated financial position or results of operation. However, the claims process, and any ensuing litigation is inherently uncertain, unpredictable and expensive. An unfavorable resolution of any particular legal claim or proceeding could have a material adverse effect on our consolidated financial position or results of operations.

A significant disruption in, or breach in security of, our information technology systems could materially and adversely affect our business or reputation.

We rely on information technology systems to keep financial records, process orders, manage inventory, coordinate shipments to customers, and operate other critical functions. Our information technology systems may be susceptible to damage, disruptions or shutdowns due to power outages, hardware failures, telecommunication failures, user errors, catastrophes or other unforeseen events. We may also be subject to security breaches caused by computer viruses, illegal break-ins or hacking, sabotage, or acts of vandalism by third parties. Our security measures or those of our third party service providers may not detect or prevent security breaches. If we were to experience a prolonged disruption in the information technology systems that involve our interactions with customers or suppliers, it could result in the loss of sales and customers and significant incremental costs, which could adversely affect our business. In addition, security breaches of our information technology systems could result in the misappropriation or unauthorized disclosure of confidential information belonging to us or to our employees, partners, customers or suppliers, which could result in our suffering significant financial or reputational damage.

Environmental liabilities and other governmental regulatory matters could force us to expend significant capital and incur substantial costs.

We are subject to various environmental laws relating to the management, disposal and remediation of hazardous materials and the discharge of pollutants into the environment. We are also subject to laws relating to workplace safety and worker health which, among other things, regulate employee exposure to hazardous substances. Harris has agreed to indemnify us for all environmental liabilities related to events or activities occurring before our acquisition of their semiconductor business. This indemnification does not expire, nor is it subject to a dollar limitation.

Based on our experience, we believe that the future cost of compliance with existing environmental and health and safety laws (and liability for known environmental conditions) even without the indemnification from Harris will not have a material adverse effect on our business, financial condition or results of operations. However, we cannot predict:

what environmental or health and safety legislation or regulations will be enacted in the future;

how existing or future laws or regulations will be enforced, administered or interpreted;

the amount of future expenditures which may be required to comply with these environmental or health and safety laws or to respond to future cleanup matters or other environmental claims; or

the extent of our obligations to the purchasers of our environmentally challenged sites.

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Item 1B.Unresolved Staff Comments.

None.

Item 2.Properties.

In the United States, we lease 154,000 square feet for our corporate headquarters in Milpitas, California, which also includes facilities for sales, design and testing functions. Additional manufacturing, warehouse and office facilities are housed in 529,000 square feet of owned facilities on 118 acres of land in Palm Bay, Florida. Additionally, we conduct engineering activity and maintain regional sales offices aggregating 220,000 square feet in various locations throughout the world including the United States, Asia and Europe. Except for our Florida facilities, which we own, all of our offices are leased and lease periods vary but all expire by 2021.

We believe that our current facilities are suitable and adequate for our present purposes.

Item 3.Legal Proceedings.

A portion of our activities are subject to export control regulations by the U.S. Department of State (“DOS”) under the U.S. Arms Export Control Act (AECA) and International Traffic in Arms Regulations (ITAR 22 CFR 120-130). In September 2010, in response to a request for information, we disclosed to the Directorate of Defense Trade Controls (DDTC) information concerning export activities for the time frame 2005 through 2010. The DOS administers the DDTC authority under ITAR 22 CFR 120-130 to impose civil penalties and other administrative sanctions for violations, including debarment from engaging in the exporting of defense articles. In June of 2013, DDTC notified us of potential violations of the ITAR and that it was considering pursuing administrative proceedings under Part 128 of the ITAR.  On June 16, 2014, we entered into a Consent Agreement (the “Agreement”) with the Office of Defense Trade Controls Compliance (“DTCC”), Bureau of Political-Military Affairs, DOS for the purpose of resolving the ITAR compliance matter. The Agreement has a two-year term and provides for: (i) payment of an aggregate civil penalty of $10 million, $4 million of which is suspended and eligible for 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 Agreement and U.S. export control regulations; (iii) two external audits of the Company’s 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 settlement, we estimated and recorded a $6 million charge in the fiscal quarter ended October 4, 2013 and an additional $4 million charge in the fiscal quarter ended April 4, 2014 when the amount of the penalty was determined. The $6 million portion of the settlement that is not subject to suspension will be paid in installments, with $3 million paid in June 2014, and $3 million payable in June 2015. We expect that investments made in its export control compliance program will be eligible for credit against the suspended portion of the settlement amount, which include: additional staffing, ongoing implementation of a new software system, employee training, and establishment of a regular compliance audit program and corrective action process.  We also expect that these investments in remedial compliance measures will be sufficient to cover the $4 million suspended payment.

 

Texas Advanced Optoelectronic Solutions, Inc. (“TAOS”) named Intersil as a defendant in a lawsuit filed on November 25, 2008, in the United States District Court for the Eastern District of Texas. Discovery has been completed, and a jury trial for the case is under way. In this action, TAOS alleges patent infringement, breach of contract, trade secret misappropriation, and tortious interference with a business relationship, and has stated during trial that it is seeking in the range of $49 million in compensatory damages, and exemplary damages, costs and interest in an unspecified amount as well as injunctive relief. We dispute TAOS’ claims, which we believe are without merit, and are defending ourselves vigorously. Given the unpredictable nature of this type of litigation and because the outcome remains subject to appeal, there is significant uncertainty regarding the ultimate outcome of this lawsuit. 

 

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

We do not believe, based on currently available facts and circumstances, that the ultimate outcome of these matters, individually and in the aggregate will have a material adverse effect on our financial position or overall trends in results of our operations. During the periods presented we have not recorded any accrual for loss contingencies associated with any legal proceedings, nor determined that

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an unfavorable outcome is probable. As a result, no amounts have been accrued or disclosed in the accompanying consolidated financial statements with respect to these legal proceedings, as potential losses for such matters are not considered probable. 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.

 

Item 4.Mine Safety Disclosures.

Not applicable.

PART II

Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

(a) Market Information

Our Class A Common Stock has been traded on the NASDAQ Stock Market since February 2000 under the symbol ISIL. We currently have the Global Select Market listing status on the NASDAQ Stock Market. Prior to February 2000, there was no public market for our common stock. The following table sets forth, for the periods indicated, the high and low closing prices per share of our Class A Common Stock as reported in NASDAQ Stock Market trading.

 

 

 

 

 

 

Quarter:

 

High

 

Low

First quarter of 2013 (from December 29, 2012 to March 29, 2013)

 

9.07 

 

8.24 

Second quarter of 2013 (from March 30, 2013 to July 5, 2013)

 

8.41 

 

7.35 

Third quarter of 2013 (from July 6, 2013 to October 4, 2013)

 

11.23 

 

7.53 

Fourth quarter of 2013 (from October 5, 2013 to January 3, 2014)

 

11.58 

 

10.03 

First quarter of 2014 (from January 4, 2014 to April 4, 2014)

 

13.41 

 

10.80 

Second quarter of 2014 (from April 5, 2014 to July 4, 2014)

 

15.82 

 

12.03 

Third quarter of 2014 (from July 5, 2014 to October 3, 2014)

 

15.94 

 

12.83 

Fourth quarter of 2014 (from October 4, 2014 to January 2, 2015)

 

14.73 

 

11.49 

 

 (b) Holders

On February 9, 2015, the last reported sale price for our Class A Common Stock was $15.00 per share. As of the same date, there were 276 record holders of our Class A Common Stock.

(c) Dividends

In fiscal years 2014 and 2013, we declared and paid quarterly dividends totaling $0.48 per share annually. The first quarter dividend in fiscal 2015 has been declared by our Board of Directors at $0.12 per share, to be paid February 27, 2015, which if annualized equates to $0.48 per share.

Our dividend policy is impacted by, among other items, our views on potential future capital requirements relating to R&D, creation and expansion of sales distribution channels, investments and acquisitions, share dilution, our stock repurchase program, legal risks, liquidity and profitability. The terms of our revolving credit facility also restrict us from paying excessive dividends and making excessive investments in capital expenditures during the term of the revolving credit facility. Determination to declare and pay a dividend will be made in a timely manner by our Board of Directors in light of these and other factors the Board of Directors deems relevant.

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(d) Equity compensation plan information

For important information regarding our equity compensation plans, please see Note 15, "Equity-Based Compensation," in the Notes to the Consolidated Financial Statements included in this Annual Report.

(e) Performance Graph

The following graph presents a comparison of the cumulative total shareholder return, assuming dividend reinvestment, on our stock with the cumulative total return of the NASDAQ Market Index and the Philadelphia Semiconductor Index for the period of five years commencing January 1, 2010 and ending January 2, 2015. The graph assumes that $100 was invested on January 1, 2010 in each of Intersil common stock, the NASDAQ Market Index, and the Philadelphia Semiconductor Index, and that all dividends were reinvested.

Picture 3

(f) Recent Sales of Unregistered Securities

We did not sell unregistered securities during fiscal 2014.

 

(g) Issuer Purchases of Equity Securities

We did not repurchase any shares during fiscal 2014.

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Item 6.Selected Financial Data.

The following table sets forth our selected financial data. The historical financial data for each year in the five year period ended January 2, 2015 is derived from our audited consolidated financial statements. 2013 is a 53 week year. All other periods presented are fiscal years and include 52 weeks. Additional information regarding 2010 and 2011 can be found in our 2010 and 2011 annual reports on form 10-K filed with the SEC. This information should be read in conjunction with the consolidated financial statements included elsewhere in this report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

2013

 

2012

 

2011

 

2010

 

(a)(f)

 

(a)(d)(f)

 

(b)(d)(e)

 

(a)(b)(c)(d)

 

(a)(b)

 

($ in thousands, except per share amounts)

Revenue

$        562,555

 

$        575,195

 

$        607,864

 

$        760,490

 

$        822,400

Net income (loss)

54,812 

 

2,855 

 

(37,649)

 

67,164 

 

26,392 

Basic earnings (loss) per share

0.42 

 

0.02 

 

(0.30)

 

0.53 

 

0.21 

Diluted earnings (loss) per share

0.41 

 

0.02 

 

(0.30)

 

0.53 

 

0.21 

Total assets

1,154,260 

 

1,191,396 

 

1,227,786 

 

1,569,223 

 

1,672,469 

Dividends per common share

0.48 

 

0.48 

 

0.48 

 

0.48 

 

0.48 

 

The following transactions affect the comparability of the results between the periods above:

a)

During fiscal years 2011 and 2010, we recorded other than temporary impairment charges and losses on investments in auction rate securities of $6.5 million and $1.2 million, respectively. During fiscal years 2014 and 2013, we recorded gains related to the recovery of previously recognized losses on auction rate securities of $1.1 million and $0.9 million, respectively.

b)

During fiscal years 2012, 2011 and 2010, we recorded discrete income tax charges (credits) of $16.8 million, $(20.6) million and $68.8 million, respectively, which are due primarily to a provision established upon the completion of field work of multi-year IRS examinations.

c)

During fiscal 2011, we recorded costs related to loss on debt extinguishment charge of $8.4 million.

d)

During fiscal years 2013, 2012, and 2011, we recorded restructuring and related costs of $28.7 million, $10.5 million, and $4.1 million, respectively.

e)

During fiscal 2012, we recorded income net of expenses from IP agreements of $14.4 million and losses related to settlement of our interest rate swaps of $5.8 million.

f)

During fiscal 2014 and 2013, we recorded provisions of $4.0 million and $6.0 million, respectively, related to a provision for export compliance settlement.

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 for battery management, processor power management, and display power management, including power regulators, converters and controllers as well as fully integrated power modules. We also provide precision analog components such as amplifiers and buffers, proximity and light sensors, data converters, optoelectronics, video decoders and interface products. As a major supplier of radiation hardened

20

 

 


 

devices 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.

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

2013

 

2012

Revenue

$

562,555 

 

100.0 

%

 

$

575,195 

 

100.0 

%

 

$

607,864 

 

100.0 

%

Cost of revenue

 

235,800 

 

41.9 

 

 

 

258,588 

 

45.0 

 

 

 

277,698 

 

45.7 

 

Gross profit

 

326,755 

 

58.1 

 

 

 

316,607 

 

55.0 

 

 

 

330,166 

 

54.3 

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

125,851 

 

22.4 

 

 

 

130,541 

 

22.7 

 

 

 

166,884 

 

27.5 

 

Selling, general and administrative

 

99,926 

 

17.8 

 

 

 

113,333 

 

19.7 

 

 

 

134,314 

 

22.1 

 

Amortization of purchased intangibles

 

22,241 

 

4.0 

 

 

 

24,579 

 

4.3 

 

 

 

29,185 

 

4.8 

 

Restructuring and related costs

 

 -

 

 -

 

 

 

28,694 

 

5.0 

 

 

 

10,490 

 

1.7 

 

Income from IP agreements

 

 -

 

 -

 

 

 

 -

 

 -

 

 

 

(14,412)

 

(2.4)

 

Provision for export compliance settlement

 

4,000 

 

0.6 

 

 

 

6,000 

 

1.0 

 

 

 

 -

 

 -

 

Operating income

 

74,737 

 

13.3 

 

 

 

13,460 

 

2.3 

 

 

 

3,705 

 

0.6 

 

Interest expense and other

 

(1,742)

 

(0.3)

 

 

 

(1,901)

 

(0.3)

 

 

 

(12,291)

 

(2.0)

 

Gain on investments

 

1,538 

 

0.3 

 

 

 

2,318 

 

0.4 

 

 

 

920 

 

0.2 

 

Income (loss) before income taxes

 

74,533 

 

13.3 

 

 

 

13,877 

 

2.4 

 

 

 

(7,666)

 

(1.2)

 

Income tax expense

 

19,721 

 

3.5 

 

 

 

11,022 

 

1.9 

 

 

 

29,983 

 

4.9 

 

Net income (loss)

$

54,812 

 

9.8 

%

 

$

2,855 

 

0.5 

%

 

$

(37,649)

 

(6.1)

%

 

 

Revenue, Cost of Revenue and Gross Margin

Revenue

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

2013

 

2012

Industrial & infrastructure

$

358,265 

 

63.7 

%

 

$

339,418 

 

59.0 

%

 

$

346,844 

 

57.1 

%

Computing

 

116,970 

 

20.8 

 

 

 

118,222 

 

20.6 

 

 

 

141,345 

 

23.2 

 

Consumer

 

87,320 

 

15.5 

 

 

 

117,555 

 

20.4 

 

 

 

119,675 

 

19.7 

 

Total 

$

562,555 

 

100.0 

%

 

$

575,195 

 

100.0 

%

 

$

607,864 

 

100.0 

%

 

Our revenue for fiscal 2014 was $562.6 million, a decrease of $12.6 million or 2.2% from fiscal 2013. Of this revenue decrease, $24.3 million came from our sales to customers in the Asia/Pacific, offset by an increase of $8.6 million and $3.1 million from sales to customers in North American and Europe and other countries, respectively.  Revenue in the industrial & infrastructure market increased from fiscal 2013 by 5.6% while revenue in the computing market and consumer market decreased by 1.1% and 25.7%, respectively.  Strong growth in power management and automotive products contributed to the increase in revenues from industrial and infrastructure end-market.  Revenue from the consumer end-market decreased for the year primarily due to weakness in gaming and the deliberate de-emphasis of low margin products.    

In aggregate, lower overall unit sales in 2014 decreased revenue by $19.6 million as compared to 2013, offset by an increase in average selling price (“ASPs”) for the related product mix which increased revenue from 2013 levels by $7.0 million.

Our revenue for fiscal 2013 was $575.2 million, a decrease of $32.7 million or 5.4% from 2012.  Of this revenue decrease, $39.0 million came from our sales to customers in the Asia, offset by an increase of $5.4 million from sales to customers in North America

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and $1.0 million from sales to customers in Europe and other countries.    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 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 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.

Geographical revenue ($ in thousands and % of revenue)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

2013

 

2012

Asia

$

411,069 

 

73.1 

%

 

$

435,383 

 

75.7 

%

 

$

474,409 

 

78.0 

%

North America

 

104,306 

 

18.5 

 

 

 

95,703 

 

16.6 

 

 

 

90,332 

 

14.9 

 

Europe and other

 

47,180 

 

8.4 

 

 

 

44,109 

 

7.7 

 

 

 

43,123 

 

7.1 

 

Total 

$

562,555 

 

100.0 

%

 

$

575,195 

 

100.0 

%

 

$

607,864 

 

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 310 basis points in fiscal 2014 from fiscal 2013. The increase was primarily due to product sales mix changes as well as manufacturing efficiencies.

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. 

Generally, our 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 3.6% or $4.6 million to $125.9 million in 2014 compared to $130.5 million for fiscal 2013 primarily as a result of lower headcount and other cost reductions from our restructuring actions undertaken in fiscal 2013. 

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.

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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 11.8% or $13.4 million to $99.9 million in 2014 compared to $113.3 million for 2013 primarily as a result of lower headcount and other cost reductions from our restructuring actions undertaken in fiscal 2013 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.

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. 

Amortization of Purchased Intangibles

Our amortization of purchased intangibles was $22.2 million in 2014, $24.6 million in 2013, and $29.2 million in 2012. The decrease in 2014 and 2013 was primarily due to certain intangibles that became fully amortized during 2012, 2013 and 2014 and the write-off of certain intangible assets to restructuring and related cost during the second quarter of fiscal 2013.

Restructuring and related costs

Our restructuring and related costs were $28.7 million in fiscal year 2013, and $10.5 million in fiscal year 2012.  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 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. 

Income from Intellectual Property Agreements

Income from intellectual property agreements was $14.4 million, net of costs, in fiscal 2012 and related 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 $ 4.0 million and $6.0 million during fiscal 2014 and 2013 respectively related to alleged violations associated with ITAR proceedings. See Note 17 to our consolidated financial statements.

Other Income and Expenses

Interest Income

Our interest income was $0.2 million in fiscal 2014 compared to $0.2 million in fiscal 2013 and $0.5 million in fiscal 2012. Interest income decreased in fiscal years 2014 and 2013 due to decreased average cash and investment balances and continued low interest rates. 

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Interest Expense and Fees

Our interest expense and fees were $1.7 million in fiscal 2014 compared to $2.1 million in 2013 and $12.8 million in 2012. Included in 2012 interest expense is $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 2014 and 2013 decreased from 2012 levels due to lower long-term debt balances.

Gain (Loss) on Investments

We recognized a gain of $1.1 million and $0.9 million in fiscal 2014 and 2013 respectively related to the recovery of previously recognized losses on Auction Rate Securities (“ARS”).

Income Tax Expense (Benefit)

Our income tax expense was $19.7 million for fiscal 2014 compared to an income tax expense of $11.0 million in fiscal 2013. Income tax for fiscal 2014 included a $1.4 million non-deductible charge related to alleged export violations from 2005 to 2010. Income tax for fiscal 2014 also included an income tax expense of $1.4 million related to tax deficiencies in equity-based compensation.  The effective tax rate differs from the 35% statutory corporate tax rate primary due to income in foreign jurisdictions with lower statutory tax rates.

Our income tax expense was $11.0 million for fiscal 2013 compared to an income tax expense of $30.0 million in fiscal 2012. Income tax for fiscal 2013 included a $2.1 million non-deductible charge related to alleged export violations from 2005 to 2010. 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. 

During fiscal year 2014, we reached final settlement with the IRS in connection with the 2010 – 2012 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 $16.4 million reduction in unrecognized tax benefits (“UTBs”), which was a component of income taxes payable, comprised of a cash payment of $5.6 million to the IRS for additional tax, a $4.2 million decrease in deferred tax assets related to federal R&D tax credits, and a $6.6 million reduction to income tax expense. Also during fiscal year 2014, we reached final settlement with Swiss tax authorities in connection with the 2009 – 2012 examination periods.  We decreased our UTBs in the amount of $7.5 million.  This reduction included a $2.7 million cash payment consisting of $2.4 million of additional tax and $0.3 million of interest and a $4.8 million decrease in deferred tax assets related to utilization of a NOL attribute. 

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 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 to federal R&D tax credits, federal alternative minimum tax (“AMT”) tax credits, and federal 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 fiscal 2013 and none during fiscal 2014.

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.

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In such event, we may be required to modify our operational structure and tax strategy. Any such modified structure or strategy may not be as beneficial as the benefits provided under the present tax concession arrangement.

The impact of income earned in foreign jurisdictions being taxed at rates different than the United States federal statutory rate was a benefit of $7.9 million and a decrease on the effective tax rate of 10.6% for fiscal 2014, compared to an expense of $3.5 million and an increase on the effective tax rate of 25.3% for fiscal 2013, and an expense of $7.3 million and an increase on the effective tax rate of 97.0% fiscal 2012. 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 do not believe that the recovery is likely, we establish a valuation allowance. As of January 2, 2015, our net deferred tax asset amounted to $59.8 million compared to $95.3 million as of January 3, 2014. 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 income tax expense could be volatile, which contributes to volatility in reported financial results. As of January 2, 2015 and January 3, 2014, our gross UTBs related to uncertain tax positions were $78.2 million and $99.3 million, respectively.

Contractual Obligations and Off-Balance Sheet Arrangements

Contractual Obligations and Commitments

The following table sets forth our future contractual obligations as of January 2, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2016

 

2017

 

2018

 

Thereafter

 

Total

Future minimum lease commitments

$            7,704

 

$            6,969

 

$            6,329

 

$            6,031

 

$            6,033

 

$       33,066

Open capital asset purchase commitments

1,334 

 

 -

 

 -

 

 -

 

 -

 

1,334 

Open raw material purchase commitments

18,527 

 

 -

 

 -

 

 -

 

 -

 

18,527 

Tax liability arising from gross UTBs

74,058 

 

 -

 

2,399 

 

1,237 

 

513 

 

78,207 

Other purchase commitments

4,668 

 

985 

 

 -

 

 -

 

 -

 

5,653 

Total

$        106,291

 

$            7,954

 

$            8,728

 

$            7,268

 

$            6,546

 

$     136,787

 

Our future minimum lease commitments consist primarily of leases for buildings and other real property. Open capital asset purchase commitments primarily include leasehold improvements and production equipment. Open raw material purchase commitments are for externally-produced wafers and include 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 2, 2015, 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 2, 2015, $157.3 million of our cash and cash equivalents 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

25

 

 


 

IRS examination periods which allows for the repatriation of $125.0 million.  During fiscal 2013, we repatriated $12.5 million of this amount with no repatriation for fiscal 2014. Therefore, $112.5 million of our cash and cash equivalents held by our foreign subsidiaries as of January 2, 2015 would not be subject to further taxation upon repatriation.  As of January 2, 2015, 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 governing the Facility. As of January 2, 2015, we were in compliance with all applicable covenants of the above-mentioned credit agreement.

Operating Activities

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

Net cash flows in fiscal 2014 from operations were $73.4 million compared to $106.7 million in 2013, a decrease of $33.3 million.  This decrease was mainly due to a net outflow from changes in operating assets and liabilities of $75.2 million in fiscal 2014 as compared to a net inflow of $25.1 million in fiscal 2013. Additionally, the net cash flows from operating activities in fiscal 2013 included non-cash portion of restructuring charges of $7.2 million. The impact of these items was offset by an increase in net income in fiscal 2014 as compared to 2013 by $51.9 million and impact of changes in deferred income taxes of $25.4 million.  Trade receivables, net, increased by $6.1 million primarily due to a less linear shipment pattern in the fourth quarter of fiscal 2014 compared to the fourth quarter of fiscal 2013.  Inventories increased by $11.4 million as a result of increased fab and assembly activity combined with a decline in customer demand in the fourth quarter which resulted in higher inventory levels at the end of the fiscal year.  The net decrease in trade payables and accrued liabilities of $13.0 million during fiscal 2014 was driven by the timing of payments, including payments of accruals related to restructuring activities.  In addition, income taxes payable decreased by $42.2 million due to the passage of the 2014 R&D credit, settlement of our 2010-2012 IRS audit which resulted in a reversal of UTPs and cash payment related to the IRS audit.

In fiscal 2013, our net cash flows from operations were $106.7 million compared to $35.6 million in 2012, an increase of $71.1 million. This increase was mainly due to an increase in net income of $40.5 million and net inflow from changes in operating assets and liabilities of $36.6 million. Trade receivables, net, decreased by $5.2 million, or 9.5%, to $49.5 million as of January 3, 2014 from $54.7 million as of December 28, 2012 primarily due to more linear shipments in the fourth quarter of fiscal 2013 compared to the fourth quarter of fiscal 2012. Inventories decreased by $12.5 million, or 16.6%, to $62.4 million as of January 3, 2014 from $74.9 million as of December 28, 2012 as a result of concerted effort to reduce inventory. In addition, the net increase in trade payables and accrued liabilities of $17.3 million during fiscal 2013 was driven by the timing of payments.

Investing activities

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

Net cash used in investing activities was $8.8 million in fiscal 2014 compared to $13.0 million used in fiscal 2013, or a decrease of $4.2 million.  Capital expenditures, net of sales proceeds, were $9.9 million for 2014 compared to $18.6 million during fiscal 2013.  Net proceeds from investment balances were $1.1 million in fiscal 2014 as compared to $5.6 million in fiscal 2013.

 

26

 

 


 

Net cash used in investing activities was $13.0 million in fiscal 2013 compared to net cash provided by investing activities of $14.3 million in fiscal 2012. Capital expenditures, net of sales proceeds, were $18.6 million for 2013, $12.2 million for 2012, and $9.8 million for 2011. Capital expenditures have been focused primarily on planned expansion of our Palm Bay facility and increases to test capacity for new product lines. Net proceeds from investment balances were $5.6 million in fiscal 2013 and $26.5 million in fiscal 2012. Investment balances declined in fiscal 2013 due to the maturity of bank time deposits.

Financing activities

Financing cash flows consist primarily of payment of dividends to stockholders, proceeds from issuance of stock under our employee stock purchase plan, repurchases of common stock, and issuance and repayment of long-term debt.

Net cash used in financing activities was $46.0 million in fiscal 2014 compared to $57.6 million in fiscal 2013, or a decrease of $11.6 million.  We paid dividends of $62.9 million during fiscal 2014, which is consistent with the $61.9 million and $62.1 million that were paid in fiscal 2013 and 2012, respectively.  We also received $15.6 million in proceeds from the exercise of equity-based awards compared to $4.3 million in proceeds during fiscal 2013.  We did not have any long-term debt outstanding during fiscal 2014.

Net cash used in financing activities was $57.6 million in fiscal 2013 compared to $274.4 million in fiscal 2012. We paid dividends of $61.9 million and $62.1 million during fiscal 2013 and 2012. We repaid debt of $200.0 million in fiscal years 2012.  

Transactions with Related and Certain Other Parties

None.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of such statements requires us to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period and the reported amounts of assets and liabilities as of the date of the financial statements. Our estimates and assumptions are based on historical experience and other factors that we consider to be appropriate in the circumstances. However, actual future results may vary from our estimates and assumptions. Based on this definition, our most critical accounting policies include revenue recognition, which impact the recording of revenues; valuation of inventories, which impacts cost of goods sold and gross margins; assessment of recoverability of intangible assets and goodwill, which impacts write-offs of goodwill and intangible assets; accounting for equity-based compensation, which impacts cost of goods sold, gross margins and operating expenses; accounting for income taxes, which impacts the income tax provision; and assessment of litigation and contingencies, which impacts charges recorded in cost of goods sold, selling, general and administrative expenses and income taxes. These policies and the estimates and judgments involved are discussed further below. We have other significant accounting policies that either do not generally require estimates and judgments that are as difficult or subjective, or it is less likely that such accounting policies would have a material impact on our reported results of operations for a given period. Our significant accounting policies are described in Note 2 to the Consolidated Financial Statements included in this Annual Report.

Receivables allowance and other allowances

Shipments to distributors are made under agreements which provide for certain pricing adjustments (referred to as “ship and debit”) and limited product return privileges, under a stock rotation provision. Many of our sales to distributors are invoiced at list price and the final price is set via ship and debit credits at the time of resale. The distributor may also receive certain price protection on a percentage of unsold inventories they hold. Accordingly, we make estimates of price adjustments based upon inventory held by distributors as of the balance sheet date and record this as a distributor allowance. We rely on historical distributor allowances to estimate these adjustments. Distributors may also receive allowances for certain parts returned under a stock rotation provision of the distributor agreement. We estimate the stock rotation provision based on the percentage of sales made to distributors and historical returns.

27

 

 


 

Inventory Allowances

We record our inventories at standard costs, which approximates the lower of actual cost or market. As the ultimate market value that we will realize through sales on our inventory cannot be known with exact certainty, we rely on past sales experience and future sales forecasts to project it. In analyzing our inventory levels, we classify certain inventory as either excess or obsolete.    Inventory adjustments establish a new cost basis and are considered permanent even if circumstances later suggest that increased carrying amounts are recoverable.    These classifications are maintained for all classes of inventory, although raw materials are seldom deemed excess or obsolete. We classify inventory as obsolete if we have withdrawn it from the marketplace or if we have had no sales of the product for the past 18 months and no sales forecasted for the next 24 months. We provide an allowance for 100% of the standard cost of obsolete inventory. We conduct reviews of excess inventory on a quarterly basis and reserve a significant portion of the excess inventory. We classify inventory as excess if we have quantities of product greater than the amounts we have sold in the past 18 months or have forecasted to sell in the next 24 months. We typically retain excess inventory until the inventory is sold or reclassified as obsolete, at which time we may scrap such inventory.

For all items identified as excess or obsolete, management reviews the relevant facts and circumstances, such as competitive landscape, industry economic conditions, product lifecycles and product cannibalization, specific to that inventory.

Product demand estimates are a key element in determining inventory allowances. Our estimate of product demand requires significant judgment and is based in part on historical revenue. Historical sales may not accurately predict future demand. If future demand is ultimately lower than our estimate, we could incur significant additional expenses to provide allowances for and scrap obsolete inventory. If demand is higher than expected, we may sell inventory that had previously been written down. Our gross margins were positively impacted by the sale of previously written-down inventory of $2.1 million, 2.4 million, and $1.5 million in fiscal 2014, 2013, and 2012, respectively.

Assessment of recoverability of goodwill

We perform an annual assessment of goodwill in the fourth quarter of each fiscal year, or more frequently if indications of potential impairment exist. We consider various qualitative factors, including macroeconomic and industry conditions, financial performance of the company, changes in the stock price of the company to determine whether it is necessary to perform a quantitative test for goodwill impairment. If we believe, as a result of our qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Under the quantitative test, goodwill is tested under a two-step method for impairment at a level of reporting referred to as a reporting unit. Step one of the quantitative analysis involves identifying potential impairment by comparing the fair value of each reporting unit with its carrying amount and, if applicable, step two involves estimation of the impairment loss, which is the amount of excess of carrying amount of goodwill over the implied fair value of the reporting unit goodwill.  In fiscal 2014, based on the qualitative assessment, we concluded that a quantitative two-step assessment was not required to be performed. In fiscal 2013, the Company performed a quantitative two-step assessment and concluded that the carrying value of inventory as at the date of the assessment had not been impaired.

Significant judgment is involved in the determination of fair value for the above analysis. Our estimates of fair value are based on a combination of the income approach, which estimates the fair value of our reporting units based on the future discounted cash flows, and the market approach, which estimates the fair value of our reporting units based on comparable market prices. The use of future discounted cash flows is based on assumptions that are consistent with our estimates of future growth and the strategic plan used to manage the underlying business. Factors requiring significant judgment include assumptions related to future growth rates, discount factors, market multiples and tax rates, amongst other considerations. Changes in economic and operating conditions that occur after the annual impairment analysis or an interim impairment analysis, and that impact these assumptions, may result in a future goodwill impairment charge. Any such impairment charge could be significant and could have a material adverse effect on our financial position and results of operations.

Accounting for income taxes 

As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. We are subject to income taxes in the United States and various foreign jurisdictions. Significant judgment is required to determine worldwide income tax liabilities. This process involves estimating our actual current tax liability together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. Our effective tax rate and the actual taxes ultimately payable could be adversely affected by changes in the mix of earnings between

28

 

 


 

countries with differing statutory tax rates, in the valuation of deferred tax assets, in tax laws or by material audit assessments, which could affect our profitability.

Temporary differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. 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 2, 2015, our net deferred tax asset amounted to $59.8 million compared to $95.3 million as of January 3, 2014.  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 2, 2015 and January 3, 2014, our gross UTBs related to uncertain tax positions were $78.2 million and $99.3 million, respectively.

Fair value of equity-based compensation

We generally calculate the fair value of an equity-based compensation grant (compensation cost) on the date of grant.  We use a lattice method of valuation for estimating the grant date fair value of awards that include market-based vesting conditions. The compensation cost is amortized straight-line over the requisite service period. Calculating fair value requires us to estimate certain key assumptions in the valuation model, including expected stock price volatility, the risk-free interest rate in the market, expected life of the award, and annualized dividend yield. Volatility is one of the most significant determinants of fair value. We estimate our volatility using the actual historic volatility of our stock price. In case of awards that include market-based vesting conditions, our estimate for volatility includes actual historical volatility of stock prices of certain peer companies.  We estimate our expected risk-free interest rate by using the zero-coupon U.S. Treasury rate at the time of the grant related to the expected life of the grant. Expected forfeitures must be estimated to offset the compensation cost expected to be recorded in the financial statements. We estimate forfeitures based on historical information about turnover for each appropriate employee level.  We estimate the annualized dividend yield by dividing the current annualized dividend by the closing stock price on the date of grant.

Loss Contingencies

We use significant judgment and assumptions to estimate the likelihood of loss or impairment of an asset, or the incurrence of a liability, in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We record a charge equal to the minimum estimated liability for litigation costs or a loss contingency only when both of the following conditions are met:

(i) information available prior to issuance of our consolidated financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the range of loss can be reasonably estimated.

We regularly evaluate current information available to us to determine whether such accruals should be adjusted and whether new accruals are required.

Recent Accounting Pronouncements

For a description of accounting changes and recent accounting guidance, including estimated effects, if any, on our consolidated financial statements, see Note 2. “Summary of Significant Accounting Policies” to Consolidated Financial Statements of this Annual Report on Form 10-K.

Recent Accounting Guidance Not Yet Adopted

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

29

 

 


 

 

Item 7A.Quantitative and Qualitative Disclosures about Market Risk.

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

Moreover, in the normal course of doing business, we are exposed to the risks associated with foreign currency exchange rates and changes in interest rates. We employ established policies and procedures governing the use of financial instruments, entered into for purposes other than trading purposes, to manage our exposure to these risks.

Our cash equivalents and investments are subject to three market risks: interest rate risk, credit risk and liquidity risk. We did not hold any short-term investments as of January 2, 2015.

A substantial majority of our revenues and liabilities outside the U.S. are billed, collected, and paid in U.S. dollars. Therefore, we do not believe we have material risk to currency rates. As of January 2, 2015, we did not have any open derivative financial instruments to manage our foreign currency risk. Please see Note 5 “Financial Instruments and Derivatives to Consolidated Financial Statements of this Annual Report on Form 10-K.

Item 8.Financial Statements and Supplementary Data.

The following consolidated financial statements and the related Notes thereto, and the financial statement schedules of Intersil Corporation and the Reports of the Independent Registered Public Accounting Firm are filed as a part of this report.

30

 

 


 

 

INTERSIL CORPORATION

 

INDEX TO FINANCIAL STATEMENTS

 

 

31

 

 


 

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Intersil Corporation:

 

We have audited the accompanying consolidated balance sheets of Intersil Corporation and subsidiaries (the Company) as of January 2, 2015 and January 3, 2014, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the three‑year period ended January 2, 2015. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Intersil Corporation and subsidiaries as of January 2, 2015 and January 3, 2014, and the results of their operations and their cash flows for each of the years in the three‑year period ended January 2, 2015, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Intersil Corporation’s internal control over financial reporting as of January 2, 2015, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 12, 2015 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

 

/s/ KPMG LLP

 

Orlando, Florida

February 12, 2015

Certified Public Accountants

32

 

 


 

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Intersil Corporation:

 

We have audited Intersil Corporation’s (the Company) internal control over financial reporting as of January 2, 2015, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Intersil Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 2, 2015, based on criteria established in Internal Control – Integrated Framework (1992) issued by COSO.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Intersil Corporation and subsidiaries as of January 2, 2015 and January 3, 2014, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the three-year period ended January 2, 2015, and our report dated February 12, 2015 expressed an unqualified opinion on those consolidated financial statements.

 

 

/s/ KPMG LLP

 

Orlando, Florida

February 12, 2015

Certified Public Accountants

33

 

 


 

INTERSIL CORPORATION

CONSOLIDATED STATEMENT OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

January 2, 2015

 

January 3, 2014

 

December 28, 2012

 

 

 

 

 

 

 

 

 

 

(in thousands, except share and per share data)

Revenue

$

562,555 

   

$

575,195 

 

$

607,864 

Cost of revenue

 

235,800 

 

 

258,588 

 

 

277,698 

Gross profit

 

326,755 

 

 

316,607 

 

 

330,166 

 

 

 

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

Research and development

 

125,851 

 

 

130,541 

 

 

166,884 

Selling, general and administrative

 

99,926 

 

 

113,333 

 

 

134,314 

Amortization of purchased intangibles

 

22,241 

 

 

24,579 

 

 

29,185 

Restructuring and related costs

 

 -

 

 

28,694 

 

 

10,490 

Income from IP agreements

 

 -

 

 

 -

 

 

(14,412)

Provision for export compliance settlement

 

4,000 

 

 

6,000 

 

 

 -

Operating income

 

74,737 

 

 

13,460 

 

 

3,705 

Interest expense and other

 

(1,742)

 

 

(1,901)

 

 

(12,291)

Gain on investments

 

1,538 

 

 

2,318 

 

 

920 

Income (loss) before income taxes

 

74,533 

 

 

13,877 

 

 

(7,666)

Income tax expense

 

19,721 

 

 

11,022 

 

 

29,983 

Net income (loss)

$

54,812 

 

$

2,855 

 

$

(37,649)

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

Basic

$

0.42 

 

$

0.02 

 

$

(0.30)

Diluted

$

0.41 

 

$

0.02 

 

$

(0.30)

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

0.48 

 

 

0.48 

 

 

0.48 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding (in millions):

 

 

 

 

 

 

 

 

Basic

 

129,149 

 

 

127,151 

 

 

127,032 

Diluted

 

132,657 

 

 

127,998 

 

 

127,032 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

 

34

 

 


 

INTERSIL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

January 2, 2015

 

January 3, 2014

 

December 28, 2012

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

Net income (loss)

$

54,812 

 

$

2,855 

 

$

(37,649)

Realized losses on interest rate swaps and available-for-sale investments, reclassified to net income (loss)

 

 -

 

 

 -

 

 

3,450 

Tax effect

 

 -

 

 

 -

 

 

(1,294)

Currency translation adjustments

 

(1,791)

 

 

(512)

 

 

225 

Comprehensive income (loss)

$

53,021 

 

$

2,343 

 

$

(35,268)

 

 

 

 

 

 

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

 

35

 

 


 

INTERSIL CORPORATION

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 2, 2015

 

January 3, 2014

 

 

 

 

 

 

Assets

 

(in thousands, except share data)

Current Assets:

 

 

 

 

 

Cash and cash equivalents

$

211,216 

 

$

194,787 

Trade receivables, net of allowances ($13,218 as of January 2, 2015 and $14,274 as of January 3, 2014)

 

55,585 

 

 

49,466 

Inventories

 

73,770 

 

 

62,408 

Prepaid expenses and other current assets

 

9,779 

 

 

9,752 

Income taxes receivable

 

1,162 

 

 

1,091 

Deferred income tax assets

 

20,433 

 

 

22,328 

Total Current Assets

 

371,945 

 

 

339,832 

Non-current Assets:

 

 

 

 

 

Property, plant & equipment, net of accumulated depreciation ($260,403 as of January 2, 2015 and $246,480 as of January 3, 2014)

 

72,272 

 

 

81,867 

Purchased intangibles, net of accumulated amortization ($99,500 as of January 2, 2015 and $97,939 as of January 3, 2014)

 

34,400 

 

 

56,641 

Goodwill

 

565,424 

 

 

565,424 

Deferred income tax assets

 

39,334 

 

 

73,008 

Other

 

70,885 

 

 

74,624 

Total Non-current Assets

 

782,315 

 

 

851,564 

Total Assets

$

1,154,260 

 

$

1,191,396 

Liabilities and Shareholders' Equity

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Trade payables

$

26,246 

 

$

26,248 

Accrued compensation

 

40,854 

 

 

42,014 

Deferred income

 

11,631 

 

 

11,936 

Other accrued expenses and liabilities

 

23,993 

 

 

35,103 

Income taxes payable

 

2,790 

 

 

14,588 

Total Current Liabilities

 

105,514 

 

 

129,889 

Non-current liabilities:

 

 

 

 

 

Income taxes payable

 

59,745 

 

 

90,102 

Other non-current liabilities

 

7,453 

 

 

13,603 

Total Non-current Liabilities

 

67,198 

 

 

103,705 

Shareholders' Equity:

 

 

 

 

 

Preferred stock, $0.01 par value, 2 million shares authorized; no shares issued or outstanding

 

 -

 

 

 -

Class A common stock, $0.01 par value, voting; 600 million shares authorized; 130,216,901 shares issued and outstanding as of January 2, 2015 and 127,714,810 shares issued and outstanding as of January 3, 2014

 

1,302 

 

 

1,277 

Additional paid-in capital

 

1,591,432 

 

 

1,620,732 

Accumulated deficit

 

(612,123)

 

 

(666,935)

Accumulated other comprehensive income

 

937 

 

 

2,728 

Total Shareholders' Equity

 

981,548 

 

 

957,802 

Total Liabilities and Shareholders' Equity

$

1,154,260 

 

$

1,191,396 

 

 

 

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

 

 

 

 

36

 

 


 

INTERSIL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock Class A

 

Additional Paid-In Capital

 

Accumulated Deficit

 

Accumulated Other Comprehensive Income (Loss)

 

Total

 

 

(in thousands except per share amounts)

Balance as of December 30, 2011

$

1,265 

 

$

1,710,705 

 

$

(632,141)

 

$

859 

 

$

1,080,688 

Net loss

 

 -

 

 

 -

 

 

(37,649)

 

 

 -

 

 

(37,649)

Dividends paid, $0.48 per common share

 

 -

 

 

(60,955)

 

 

 -

 

 

 -

 

 

(60,955)

Dividends accrued to Award holders prior to vesting

 

 -

 

 

(501)

 

 

 -

 

 

 -

 

 

(501)

Equity-based compensation expense

 

 -

 

 

24,607 

 

 

 -

 

 

 -

 

 

24,607 

Shares issued under share-based award plans

 

17 

 

 

3,734 

 

 

 -

 

 

 -

 

 

3,751 

Tax impact of shares issued under share-based award plans

 

 -

 

 

(2,452)

 

 

 -

 

 

 -

 

 

(2,452)

Foreign currency translation

 

 -

 

 

 -

 

 

 -

 

 

225 

 

 

225 

Realized losses on interest rate swaps, net of tax, reclassified

 

 -

 

 

 -

 

 

 -

 

 

2,156 

 

 

2,156 

Shares repurchased and retired

 

(19)

 

 

(15,243)

 

 

 -

 

 

 -

 

 

(15,262)

Balance as of December 28, 2012

$

1,263 

 

$

1,659,895 

 

$

(669,790)

 

$

3,240 

 

$

994,608 

Net income

 

 -

 

 

 -

 

 

2,855 

 

 

 -

 

 

2,855 

Dividends paid, $0.48 per common share

 

 -

 

 

(61,025)

 

 

 -

 

 

 -

 

 

(61,025)

Dividends accrued to Award holders prior to vesting

 

 -

 

 

(1,094)

 

 

 -

 

 

 -

 

 

(1,094)

Equity-based compensation expense

 

 -

 

 

19,091 

 

 

 -

 

 

 -

 

 

19,091 

Shares issued under share-based award plans

 

14 

 

 

4,316 

 

 

 -

 

 

 -

 

 

4,330 

Tax impact of shares issued under share-based award plans

 

 -

 

 

(451)

 

 

 -

 

 

 -

 

 

(451)

Foreign currency translation

 

 -

 

 

 -

 

 

 -

 

 

(512)

 

 

(512)

Balance as of January 3, 2014

$

1,277 

 

$

1,620,732 

 

$

(666,935)

 

$

2,728 

 

$

957,802 

Net income

 

 -

 

 

 -

 

 

54,812 

 

 

 -

 

 

54,812 

Dividends paid, $0.48 per common share

 

 -

 

 

(61,960)

 

 

 -

 

 

 -

 

 

(61,960)

Dividends accrued to Award holders prior to vesting

 

 -

 

 

(1,798)

 

 

 -

 

 

 -

 

 

(1,798)

Equity-based compensation expense

 

 -

 

 

18,688 

 

 

 -

 

 

 -

 

 

18,688 

Shares issued under share-based award plans

 

25 

 

 

15,533 

 

 

 -

 

 

 -

 

 

15,558 

Tax impact of shares issued under share-based award plans

 

 -

 

 

237 

 

 

 -

 

 

 -

 

 

237 

Foreign currency translation

 

 -

 

 

 -

 

 

 -

 

 

(1,791)

 

 

(1,791)

Balance as of January 2, 2015

$

1,302 

 

$

1,591,432 

 

$

(612,123)

 

$

937 

 

$

981,548 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

37

 

 


 

 

 

 

 

 

 

INTERSIL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

January 2, 2015

 

January 3, 2014

 

December 28, 2012

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

Operating Activities

 

 

 

 

 

 

 

 

Net income (loss)

$

54,812 

 

$

2,855 

 

$

(37,649)

Adjustments to reconcile net income (loss) to net cash flows from operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

41,664 

 

 

43,529 

 

 

48,652 

Equity-based compensation

 

18,688 

 

 

19,091 

 

 

24,607 

Excess tax benefit received on exercise of stock options

 

(1,158)

 

 

(474)

 

 

(2,455)

Loss / (gain) on disposal of property and equipment, net

 

71 

 

 

102 

 

 

(67)

Gain on investments

 

(1,075)

 

 

(866)

 

 

 -

Non-cash portion of restructuring charges

 

 -

 

 

7,184 

 

 

 -

Deferred income taxes

 

35,569 

 

 

10,196 

 

 

14,003 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Trade receivables

 

(6,118)

 

 

5,218 

 

 

10,190 

Inventories

 

(11,363)

 

 

12,461 

 

 

23,021 

Prepaid expenses and other current assets

 

(28)

 

 

625 

 

 

2,491 

Trade payables and accrued liabilities

 

(13,032)

 

 

17,355 

 

 

(6,752)

Income taxes

 

(42,226)

 

 

(9,417)

 

 

(41,327)

Other, net

 

(2,415)

 

 

(1,145)

 

 

857 

Net cash flows from operating activities

 

73,389 

 

 

106,714 

 

 

35,571 

 

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

 

 

Proceeds from short-term investments

 

 -

 

 

4,750 

 

 

26,500 

Proceeds from long-term investments

 

1,075 

 

 

866 

 

 

 -

Proceeds from sales of property, plant and equipment

 

 -

 

 

 -

 

 

320 

Purchase of property, plant and equipment

 

(9,857)

 

 

(18,581)

 

 

(12,540)

Net cash flows from investing activities

 

(8,782)

 

 

(12,965)

 

 

14,280 

 

 

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

 

 

 

Proceeds from exercise of equity-based awards

 

15,558 

 

 

4,330 

 

 

3,751 

Excess tax benefit received from exercise of equity-based awards

 

1,381 

 

 

23 

 

 

Repayments of long-term debt

 

 -

 

 

 -

 

 

(200,000)

Payment of credit facility fees

 

 -

 

 

 -

 

 

(855)

Dividends paid

 

(62,910)

 

 

(61,920)

 

 

(62,057)

Repurchase of common stock

 

 -

 

 

 -

 

 

(15,262)

Net cash flows from financing activities

 

(45,971)

 

 

(57,567)

 

 

(274,420)

Effect of exchange rates on cash and cash equivalents

 

(2,207)

 

 

(205)

 

 

(314)

Net change in cash and cash equivalents

 

16,429 

 

 

35,977 

 

 

(224,883)

Cash and cash equivalents at the beginning of the period

 

194,787 

 

 

158,810 

 

 

383,693 

Cash and cash equivalents at the end of the period

$

211,216 

 

$

194,787 

 

$

158,810 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

 

 

 

 

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INTERSIL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION

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

Basis of Presentation

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

The consolidated financial statements include the accounts of Intersil and its subsidiaries. All intercompany accounts and transactions have been eliminated.

Reclassifications

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

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES

 

Cash and Cash Equivalents—Cash equivalents consist of highly liquid investments with original maturities of three months or less at the time of purchase. Investments with original maturities over three months are classified as short-term investments. We determine the appropriate classification of our cash and cash equivalents at the time of purchase.

Short-term Investments—Our short-term investments are considered available-for-sale. We record the unrealized gains and losses, net of tax, in shareholders’ equity as a component of accumulated other comprehensive income (“OCI”). We determine the cost of securities sold based on the specific identification method. Realized gains or losses are recorded in gains / loss on sale of investments and impairment losses that are determined to be other-than-temporary are recorded in other-than-temporary impairment losses in our consolidated statement of operations.

Non-Marketable Equity Securities—Non-marketable equity securities are accounted for at historical cost or, if we have significant influence over the investee, using the equity method of accounting. These investments are evaluated for impairment quarterly. Such analysis requires significant judgment to identify events or circumstances that would likely have a significant other than temporary adverse effect on the carrying value of the investment.

Deferred Compensation Plan Assets—We have made available a non-qualified deferred compensation plan for certain eligible employees. Participants can direct the investment of their deferred compensation plan accounts from a portfolio of funds from which earnings are measured. Although participants direct the investment of these funds, they are classified as trading securities and are included in other non-current assets because they remain our assets until they are actually paid out to the participants. We maintain a portfolio of $11.1 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 2014, 2013 and 2012, we recorded gains on deferred compensation investments of $0.5 million, $1.5 million, and $0.9 million, respectively and compensation expense of $0.7 million, $1.7 million, and $1.1 million, respectively.

Fair Value Measurements—In order to determine the fair value of our assets and liabilities, we utilize three levels of inputs, focusing on the most observable inputs when available. Observable inputs are generally developed based on market data obtained from independent sources, whereas unobservable inputs reflect our assumptions about what market participants would use to value the asset or liability, based on the best information available in the circumstances. The three levels of inputs are as follows:

39

 

 


 

Level 1—Quoted prices in active markets which are unadjusted and accessible as of the measurement date for identical, unrestricted assets or liabilities;

Level 2—Quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly;

Level 3—Prices or valuations that require inputs that are unobservable and significant to the overall fair value measurement.

If we use more than one level of input that significantly affects fair value, we include the fair value under the lowest input level used.

Derivatives— We record the fair value of our derivative financial instruments in the consolidated financial statements in other current assets or other accrued expenses, regardless of the purpose or intent for holding the derivative contract. We account for these instruments based on whether they meet the criteria for designation as hedging transactions, either as cash flow or fair value hedges. A hedge of the exposure to variability in the cash flows of an asset or a liability, or of a forecasted transaction, is referred to as a cash flow hedge. A hedge of the exposure to changes in fair value of an asset or a liability, or of an unrecognized firm commitment, is referred to as a fair value hedge. The criteria for designating a derivative as a hedge include the instrument’s effectiveness in risk reduction and, in most cases, a one-to-one matching of the derivative instrument to its underlying transaction.

Changes in the fair value of derivative instruments designated as a cash flow hedge are recorded in OCI to the extent the derivative instrument is effective. Changes in the fair values of derivatives not designated for hedge accounting and any ineffectiveness measured in designated hedge transactions are reported in earnings as they occur. Gains and losses on derivatives not designated as hedges are recognized currently in earnings and generally offset changes in the values of related assets, liabilities or debt. Hedges on forecasted foreign cash flow commitments do not qualify for deferral, as the hedges are not related to a specific, identifiable transaction. Therefore, gains and losses on changes in the fair market value of the foreign exchange contracts are recognized currently in cost of revenue.

The changes in the fair value of our interest rate swaps are recorded in OCI to the extent that the swap is effective. Any ineffectiveness will be recorded in income. We currently have no outstanding swap contracts in place.

Trade Receivables, net —Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Accounts receivable are reduced by an allowance for doubtful accounts, which  reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on the aging of our accounts receivable, historical experience, known troubled accounts, management judgment and other currently available evidence. When items are deemed uncollectible, we charge them against the allowance for collection losses. We provide for estimated losses from collection problems in the current period, as a component of revenue. We utilize credit limits, ongoing evaluation and trade receivable monitoring procedures to reduce the risk of credit loss. Credit is extended based on an evaluation of the customer’s financial condition and collateral is generally not required. Accounts receivable are also recorded net of sales returns and distributor allowances. These amounts are recorded when it is both probable and estimable that discounts will be granted or products will be returned. - Please see “Revenue Recognition” for further details.

Inventories—Inventories are carried at the lower of standard cost (which approximates actual cost, determined by the first-in-first-out method) or market. The carrying value of our inventories is reduced for any difference between cost and estimated market value of inventories that is determined to be obsolete or unmarketable, based upon assumptions about future demand and market conditions. Inventory adjustments establish a new cost basis and are considered permanent even if circumstances later suggest that increased carrying amounts are recoverable. If demand is higher than expected, we may sell inventory that had previously been written down.

Property, Plant and Equipment—Buildings, machinery and equipment are carried at cost, less accumulated depreciation and impairment charges, if any. We expense repairs and maintenance costs that do not extend an asset’s useful life or increase an asset’s capacity. Depreciation is computed using the straight-line method over the estimated useful life of the asset. The estimated useful lives of buildings, which include leasehold improvements, range between 10 and 30 years, or over the lease period, whichever is shorter. The estimated useful lives of machinery and equipment range between three and eight years. We lease certain facilities under operating leases and record the effective rental expense in the appropriate period on the straight-line method.

40

 

 


 

Asset Impairment—We recognize impairment losses on long-lived assets when indicators of impairment exist and our estimate of undiscounted cash flows generated by those assets is less than the assets’ carrying amounts. The impairment loss is measured by comparing the fair value of the asset to its carrying amount. Fair value is estimated based on discounted future cash flows or market value, if available. Assets that qualify as held for sale are stated at the lower of the assets’ carrying amount or fair value and depreciation is no longer recognized.

Goodwill— Goodwill is an indefinite-lived intangible asset that is not amortized, but instead is tested for impairment annually or more frequently if indicators of impairment exist. We perform an annual assessment of goodwill in the fourth quarter of each fiscal year, or more frequently if indications of potential impairment exist. We consider various qualitative factors, including macroeconomic and industry conditions, financial performance of the company, changes in the stock price of the company to determine whether it is necessary to perform a quantitative test for goodwill impairment. If we believe, as a result of our qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Under the quantitative test, goodwill is tested under a two-step method for impairment at a level of reporting referred to as a reporting unit. Step one of the quantitative analysis involves identifying potential impairment by comparing the fair value of each reporting unit with its carrying amount and, if applicable, step two involves estimation of the impairment loss, which is the amount of excess of carrying amount of goodwill over the implied fair value of the reporting unit goodwill.  In fiscal 2014, based on the qualitative assessment, we concluded that a quantitative two-step assessment was not required to be performed. In fiscal 2013, we performed a quantitative two-step assessment and concluded that the carrying value of goodwill at the date of the assessment had not been impaired.

Purchased IntangiblesPurchased intangible assets with finite lives are carried at cost less accumulated amortization. Amortization is computed on a straight-line basis over their estimated useful lives. Purchased intangibles include intangible assets subject to amortization, which are our developed technologies, backlog, customer relationships and intellectual property. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We measure recoverability of long-lived assets by comparing the carrying amount of the asset group to the future undiscounted net cash flows expected to be generated by those assets. If such assets are considered to be impaired, we recognize an impairment charge for the amount by which the carrying amounts of the assets exceeds the fair value of the assets.

Income Taxes—We follow the liability method of accounting for income taxes. Current income taxes payable and receivable and deferred income taxes resulting from temporary differences between the financial statements and the tax basis of assets and liabilities are separately classified on the consolidated balance sheets.

Uncertain tax positions and unrecognized tax benefits (“UTBs”)—We record our tax expense based on various probabilities of sustaining certain tax positions, using a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We record our UTBs as a component of non-current income taxes payable, unless payment is expected within one year.

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 estimate of tax expense could change.

We classify accrued interest and penalties on income tax matters in the liabilities section of the balance sheet as non-current income taxes payable. When the interest and penalty portions of such uncertain tax positions are adjusted, it is classified as income tax expense. All of the uncertain tax positions and UTBs as of January 2, 2015 would impact our effective tax rate should they be recognized.

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, Malaysia 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 expense (benefit), 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 laws in the jurisdictions in which we do business. Significant changes in enacted tax law could materially impact our estimates. 

Restructuring— We record restructuring charges when severance obligations are probable, reasonably estimable and the vested right attributable to the employees’ service is already rendered. We recognize a liability for costs associated with exit or disposal activities 

41

 

 


 

including costs associated with leases, when a liability is incurred rather than when an exit or disposal plan is approved. We continually evaluate the adequacy of the remaining liabilities under our restructuring initiatives. Although we believe that these estimates accurately reflect the costs of our restructuring plans, actual results may differ, thereby requiring us to record additional provisions or reverse a portion of such provisions.

Revenue Recognition—Revenue is generally recognized when a product is shipped, provided that persuasive evidence of a sales arrangement exists, the price is fixed or determinable, title and risk has transferred, collection of resulting receivables is reasonably assured, there are no customer acceptance requirements and there are no remaining significant obligations. Customers typically provide a customer request date (“CRD”) which indicates the preferred date for receipt of the ordered products. Based on estimated transit time and other logistics, we may deliver products to the carrier in advance of the CRD and recognize revenue from the sale of such products at the time of shipment. We defer revenue recognition when the shipment occurs more than 10 days in advance of the CRD.

Shipments to distributors are made under agreements which provide for certain pricing adjustments (referred to as “ship and debit”) and limited product return privileges, under a stock rotation provision. The distributor may also receive additional price protection on a percentage of unsold inventories they hold. Accordingly, we make estimates of price adjustments based upon inventory reported by distributors as of the balance sheet date and record this as a distributor allowance. We rely on historical distributor allowances to estimate these adjustments. Distributors may also receive allowances for certain parts returned under a stock rotation provision of the distributor agreement. We estimate the stock rotation provision based on the percentage of sales made to distributors and historical returns.

For certain distributors, we defer recognition until the distributors resell the products to their end customer (“sell-through distributor”). Revenue at published list price and cost of revenue to sell-through distributors are deferred until either the product is resold by the distributor or, in certain cases, return privileges terminate, at which time revenue and cost of revenue are recorded in the consolidated statement of operations. The final price is also subject to ship and debit credits, reducing the final amount recorded in revenue at resale.

 

The following table summarizes the deferred income balance, primarily consisting of sell-through distributors (in thousands):

 

 

 

 

 

 

 

 

As of January 2, 2015

 

As of January 3, 2014

Deferred revenue at published list price

$

14,546 

 

$

15,075 

Deferred cost of revenue

$

(2,915)

 

$

(3,139)

Deferred income 

$

11,631 

 

$

11,936 

 

 

Distributors provide us periodic data regarding the product, price, quantity, and end customer when products are resold as well as the quantities of our products they still have in stock. We must use estimates and apply judgment to reconcile distributors' reported inventories to their activities. Any error in our judgment could lead to inaccurate reporting of our revenue, cost of revenue, trade receivables, deferred income, and net income.

Warranty—We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our suppliers, the estimated warranty obligation is affected by ongoing product failure rates and material usage costs incurred in correcting a product failure. Actual product failure rates or material usage costs that differ from estimates result in revisions to the estimated warranty liability. We warrant for a limited period of time that our products will be free from defects in material workmanship and possess the electrical characteristics to which we have committed. We estimate warranty allowances based on historical warranty experience. Historically, warranty expenses were not material to our consolidated financial statements.

Research and Development—Research and development costs consist of the cost of designing, developing and testing new or significantly enhanced products and are expensed as incurred.

Advertising ExpenseAdvertising costs are expensed in the period incurred. Advertising expense was $4.2 million, $3.4 million, and $6.3 million in 2014, 2013 and 2012, respectively.

42

 

 


 

Equity-based Compensation—Our equity-based compensation plans allow several forms of equity compensation including stock options (“Options”), restricted and deferred stock awards (“Awards”) and employee stock purchase plans (“ESPPs”). The 2008 Equity Compensation Plan (“2008 Plan”) includes several available forms of stock compensation of which only Options and Awards have been granted to date. Awards issued consist of deferred stock units and restricted stock units, which may differ in regard to the timing of the related prospective taxable event to the recipient.

Additionally, we have an ESPP Plan (“2000 Plan”) whereby eligible employees can purchase shares of Intersil’s common stock through payroll deductions at a price not less than 85% of the market value of the stock on specified dates, with no look-back provision.

Our plans allow employees an option to have awards withheld as a means of meeting minimum statutory tax withholding requirements. For the majority of awards granted, the number of shares issued on the date the awards vest is net of the minimum statutory withholding requirements that we pay in cash to the appropriate taxing authorities on behalf of our employees. In our consolidated financial statements, we treat shares withheld for tax purposes on behalf of our employees in connection with the vesting of awards as common stock repurchases because they reduce the number of shares that would have been issued upon vesting. Withheld shares are cancelled immediately and are not considered outstanding.

Equity-based compensation cost is measured at the grant date, based on the fair value of the awards ultimately expected to vest, and is recognized as an expense, on a straight-line basis, over the requisite service period. We use a lattice method of valuation for estimating the grant date fair value of awards that include market-based vesting conditions. The compensation cost is amortized straight-line over the requisite service period. Calculating fair value requires us to estimate certain key assumptions in the valuation model, including expected stock price volatility, the risk-free interest rate in the market, expected life of the award, and annualized dividend yield. Volatility is one of the most significant determinants of fair value. We estimate our volatility using the actual historic volatility of our stock price. In case of awards that include market-based vesting conditions, our estimate for volatility includes actual historical volatility of stock prices of certain peer companies.  We estimate our expected risk-free interest rate by using the zero-coupon U.S. Treasury rate at the time of the grant related to the expected life of the grant. Expected forfeitures must be estimated to offset the compensation cost expected to be recorded in the financial statements. We estimate forfeitures based on historical information about turnover for each appropriate employee level.  We estimate the annualized dividend yield by dividing the current annualized dividend by the closing stock price on the date of grant.

Most options vest 25% in the first year and quarterly thereafter for three or four years and generally have seven year contract lives. For Awards, the expected life for amortization of the grant date fair value is the vesting term, generally three years in the case of deferred stock units and four years in the case of restricted stock units. We issue new shares of common stock upon the exercise of Options.

Grants with only a performance condition requirement are evaluated periodically for the estimated number of shares that might be issued when fully vested. The fair value measurement and its effect on income is then adjusted as a result of these periodic evaluations. If our estimate of the number of shares expected to be earned (vested) changes, we will be required to adjust the amount of equity-based compensation recognized for the service provided to the date of the change in estimate, on a cumulative basis, to reflect the higher or lower number of shares expected to vest. Such adjustments could materially increase or decrease the amount of equity-based compensation recognized in any period, particularly the period of the change in the estimate, and in aggregate as compared to the initial fair value measurement. Therefore, the use of performance-based forms of equity-based compensation can cause more volatility in our net income in various periods and in aggregate. We do not currently have any grants that include only a performance condition requirement.

Loss Contingencies—We estimate and accrue loss contingencies at the point that the losses become probable. For litigation, our practice is to include an estimate of legal costs for defense.

Retirement Benefits—We sponsor a 401(K) savings and investment plan that allows eligible U.S employees to participate in making pre-tax contributions to the 401(K). We match the employee contributions on a dollar-for-dollar basis up to a certain predetermined percentage. Employees fully vest in the matching contributions after five years of service. We made matching contributions of $4.5 million, $5.4 million, and $6.2 million during fiscal years 2014, 2013, and 2012 respectively.

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We have voluntary defined contribution plans in various non-U.S. locations. Further, we maintain a limited number of defined benefit plans for certain non-U.S. locations. Total costs under these plans were $0.8 million, $3.6 million, and $1.3 million during fiscal years 2014, 2013, and 2012 respectively. Accrued liabilities relating to these unfunded plans were $6.8 million and $7.5 million as of January 2, 2015 and January 3, 2014, respectively.

Foreign Currency Translation— For subsidiaries in which the functional currency is the local currency, gains and losses resulting from translation of foreign currency financial statements into U.S. dollars are recorded as a component of accumulated other comprehensive income. Cumulative translation adjustments in accumulated OCI were $0.9 million, $2.7 million, and $3.2 million as of January 2, 2015, January 3, 2014, and December 28, 2012, respectively. For subsidiaries where the functional currency is the U.S. dollar, gains and losses resulting from re-measuring transactions denominated in currencies other than the US dollar have not been significant for any period presented.

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

Use of Estimates—The financial statements have been prepared in conformity with accounting principles generally accepted in the United States and require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Recent Adopted Accounting Guidance

In July 2013, the FASB issued an accounting standard update that provides explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward or a tax credit carryforward exists. Under the new standard update, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, is to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward or a tax credit carryforward. This accounting standard update was effective for our first quarter of fiscal 2014 and applied prospectively. Impact of application of this accounting standard on our Consolidated Financial Statements as been discussed in Note 9 – Income Taxes.

 

In July 2012, the FASB issued an accounting standard update intended to simplify how an entity tests indefinite-lived intangible assets and goodwill for impairment by providing entities with an option to perform a qualitative assessment to determine whether further impairment testing is necessary. This accounting standard update became effective for us beginning in the first quarter of fiscal 2014, and its adoption did not have any impact on our Consolidated Financial Statements.

 

In December 2011, the Financial Accounting Standards Board (“FASB”) issued accounting standards update that requires additional disclosure to enhance the comparability of U.S. GAAP and International Financial Reporting Standards financial statements. In January 2013, the FASB issued Accounting Standards Update 2013-01 "Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities." This standard provided additional guidance on the scope of ASU 2011-11. Retrospective application is required and the guidance concerns disclosure only. The standard was effective for our first quarter of fiscal year 2013 and did not have a material impact on our financial statements.

 

Recent Accounting Guidance Not Yet Adopted

In June 2014, the FASB issued authoritative guidance that resolves the diverse accounting treatment for share-based payment awards that require a specific performance target to be achieved in order for employees to become eligible to vest in the awards. The guidance applies to entities that grant their employees share-based awards that include a performance target that could be achieved after the requisite service period. The guidance explicitly requires that a performance target of this nature be treated as a performance condition and should not be reflected in estimating the grant-date fair value of the award. We are currently evaluating the impact that this guidance will have on our financial condition and results of operations.

 

On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for Intersil on December 31, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements

44

 

 


 

and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting. 

 

In April 2014, the FASB issued authoritative guidance that raises the threshold for a disposal transaction to qualify as a discontinued operation and requires additional disclosures about discontinued operations and disposals of individually significant components that do not qualify as discontinued operations. This guidance will be effective prospectively for the first quarter of our fiscal year 2016, which will only affect any dispositions we may make after the effective date.

 

In March 2013, the FASB issued an accounting standard update requiring an entity to release into net income the entire amount of a cumulative translation adjustment related to its investment in a foreign entity when as a parent it sells either a part or all of its investment in the foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets within the foreign entity. This accounting standard update is effective for the Company beginning in the first quarter of fiscal 2015. Upon adoption, the application of this accounting standard update did not have any impact to the Company's Consolidated Financial Statements.

 

45

 

 


 

 

NOTE 3—FAIR VALUE MEASUREMENTS

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value as of January 2, 2015 using:

 

 

Total

 

Quoted prices in active markets for identical assets (Level 1)

 

Significant other observable inputs (Level 2)

Assets

 

 

 

 

 

 

 

 

 

Other non-current assets:

 

 

 

 

 

 

 

 

 

Deferred compensation investments

 

$

11,144 

 

$

353 

 

$

10,791 

Total assets measured at fair value

 

$

11,144 

 

$

353 

 

$

10,791 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value as of January 3, 2014 using:

 

 

 

Total

 

Quoted prices in active markets for identical assets (Level 1)

 

Significant other observable inputs (Level 2)

Assets

 

 

 

 

 

 

 

 

 

Other non-current assets:

 

 

 

 

 

 

 

 

 

Deferred compensation investments

 

$

11,579 

 

$

491 

 

$

11,088 

Total assets measured at fair value

 

$

11,579 

 

$

491 

 

$

11,088 

 

 

 

 

 

 

 

 

 

There were no transfers into or out of Level 1,  Level 2, or Level 3 financial assets and liabilities during fiscal years 2014 or 2013.

For actively traded securities and bank time deposits, we generally rely upon the valuations as provided by the third-party custodian of these assets or liabilities.

NOTE 4—FINANCIAL INSTRUMENTS AND DERIVATIVES

We did not have any derivative instruments designated as hedging instruments outstanding on January 2, 2015 or January 3, 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended

 

 

Income statement location

 

December 28, 2012

Interest rate swap agreements

 

 

 

 

 

Loss reclassified from accumulated OCI to earnings (effective portion)

 

Interest expense and fees

 

$

(6,547)

Loss recognized in earnings (ineffective portion)

 

Interest expense and fees

 

$

(95)

During the third quarter of fiscal 2011, we entered into additional interest rate swap transactions with a notional value of $150.0 million to hedge a portion of the risk of changes in the benchmark interest rate of the one-month London Interbank Offered Rate (“LIBOR”) related to our new outstanding revolving credit facility. Under the terms of the swaps, we effectively converted $150.0 million of our variable-rate revolving credit facility to fixed interest rates through August 8, 2016.

During the fourth quarter of fiscal 2012, we repaid the outstanding balance of our revolving credit facility. As a result, we determined that the forecasted interest payments associated with the original hedge transactions would no longer occur. The remaining balance in OCI, before tax, of $5.8 million, related to the effective portion of the loss on the swaps, was reclassified to interest expense and fees. We settled the swaps for $3.7 million during fiscal 2012.

46

 

 


 

The effects of derivatives not designated as hedging instruments on the consolidated statements of operations are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended

 

 

Income statement location

 

December 28, 2012

Loss on foreign exchange options

 

Cost of revenue

 

 

(679)

 

The table below describes total open foreign exchange contracts (all are options to sell foreign currencies) (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended

 

 

 

 

 

December 28, 2012

Unrealized (loss) gain on foreign exchange contracts

 

$

(653)

Purchases and sales of foreign exchange contracts

 

 

31,428 

Notional amount of open contracts as of year end

 

 

12,429 

 

 

 

 

 

 

 

 

 

 

Notional Amount of Open Foreign Currency Contracts

Euros

 

U.S. Dollars

 

Range of Maturities

December 28, 2012

10,000 

 

$

12,429 

 

1 - 5 months

 

 

 

 

NOTE 5—INVENTORIES

Inventories are summarized below (in thousands):

 

 

 

 

 

 

 

 

As of

 

As of

 

January 2, 2015

 

January 3, 2014

Finished products

$

22,758 

 

$

20,783 

Work in process

 

47,083 

 

 

38,759 

Raw materials

 

3,929 

 

 

2,866 

Total inventories

$

73,770 

 

$

62,408 

 

As of January 2, 2015,  we were committed to purchase $18.5 million of inventory from suppliers.

47

 

 


 

 

NOTE 6—PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are summarized below (in thousands):

 

 

 

 

 

 

 

 

As of

 

As of

 

January 2, 2015

 

January 3, 2014

Land

$

1,708 

 

$

1,708 

Buildings and leasehold improvements

 

60,728 

 

 

59,743 

Machinery and equipment

 

264,325 

 

 

244,940 

Construction in progress

 

5,914 

 

 

21,956 

Total property, plant and equipment

 

332,675 

 

 

328,347 

Accumulated depreciation and leasehold amortization

 

(260,403)

 

 

(246,480)

Total property, plant and equipment, net

$

72,272 

 

$

81,867 

 

Depreciation expense was $19.4 million, $19.0 million, and $19.5 million for fiscal years 2014, 2013 and 2012, respectively. Non-cash accruals for purchases of property, plant and equipment were immaterial for fiscal years 2014 and 2013, respectively, and $1.5 million for fiscal 2012. As of January 2, 2015, we had open capital asset purchase commitments of $1.3 million.

NOTE 7—GOODWILL AND PURCHASED INTANGIBLES

Goodwill—The following table summarizes changes in net goodwill balances for our one reportable segment (in thousands):

 

 

 

 

 

 

 

Gross goodwill balance as of January 2, 2015 and January 3, 2014

$

1,720,100 

Accumulated impairment charge

 

(1,154,676)

Net goodwill balance as of January 2, 2015 and January 3, 2014

$

565,424 

 

During the third quarter of fiscal year 2013, we reorganized from three reporting units into four reporting units – specialty, mobile, precision and industrial & infrastructure. We performed a fair value analysis to allocate our goodwill at the time of the reorganization and performed an impairment test of goodwill as of the date of reorganization. Based on our analysis, no impairment was indicated.

We perform an annual test of goodwill in the fourth quarter of each fiscal year. In fiscal years 2014, 2013 and 2012, we recorded no impairment of goodwill based on our analysis. The fair value of the reporting units was significantly in excess of the carrying value as of October 4, 2014, the first day of our fourth quarter and the date at which we performed our qualitative assessment.  During fiscal years 2013 and 2012, we had performed a quantitative assessment.

If we experience significant declines in our stock price, market capitalization, future expected cash flows, significant adverse changes in the business climate or continuing slower growth rates, we may need to perform additional impairment analysis of our goodwill in future periods prior to our annual test in the fourth quarter. We can provide no assurance that the significant assumptions used in our analysis will not change substantially and any additional analysis could result in additional impairment charges.

Purchased intangibles—Substantially all of our purchased intangibles consist of multiple elements of developed technology which had estimated useful lives of five years at the time of purchase. Other purchased intangibles consist of other identifiable assets, primarily customer relationships, with estimated useful lives of four to seven years. Purchased intangibles are summarized as follows (in thousands):

 

 

48

 

 


 

 

 

 

 

 

 

 

 

 

 

As of January 2, 2015

 

 

Definite-lived: developed technologies

 

 

Definite-lived: other

 

 

Total purchased intangibles

 

 

 

 

 

 

 

 

 

Gross carrying amount

$

89,700 

 

$

44,200 

 

$

133,900 

Accumulated amortization

 

66,654 

 

 

32,846 

 

 

99,500 

Purchased intangibles, net

$

23,046 

 

$

11,354 

 

$

34,400 

 

 

 

 

 

 

 

 

 

 

 

As of January 3, 2014

 

 

Definite-lived: developed technologies

 

 

Definite-lived: other

 

 

Total purchased intangibles

 

 

 

 

 

 

 

 

 

Gross carrying amount

$

105,981 

 

$

48,599 

 

$

154,580 

Accumulated amortization

 

68,730 

 

 

29,209 

 

 

97,939 

Purchased intangibles, net

$

37,251 

 

$

19,390 

 

$

56,641 

 

We recorded amortization expense as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

By statement of operations line item

 

January 2, 2015

 

 

January 3, 2014

 

 

December 28, 2012

Amortization of purchased intangibles

$

22,241 

 

$

24,579 

 

$

29,185 

 

We write-off those intangible assets that have become fully amortized during the year.  Purchased intangibles were evaluated for impairment during fiscal 2013 and we recognized an impairment charge of $1.8 million on certain developed technology intangibles due to cost reduction initiatives included in our February 2013 restructuring plan (See Note 8). The impairment charge was included as a component of selling, general and administrative costs in our consolidated statements of operations.  No impairment in carrying value of purchased intangibles was recorded in fiscal year 2014. 

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

 

 

 

 

To be recognized in:

 

 

Fiscal year 2015

$

16,717 

Fiscal year 2016

 

9,010 

Fiscal year 2017

 

6,757 

Fiscal year 2018

 

1,916 

Total expected amortization expense

$

34,400 

 

 

NOTE 8—RESTRUCTURING AND RELATED COSTS

As part of an effort to streamline operations with changing market conditions and to create a more efficient organization, we had in prior fiscal years undertaken restructuring actions to reduce our workforce and consolidate facilities. Our restructuring costs consisted primarily of: (i) severance and termination benefit costs related to the reduction of our workforce; and (ii) lease termination costs and costs associated with permanently vacating certain facilities.  

In October 2013, we adopted a restructuring plan to realign our internal fabrication facilities with existing requirements, (the “October 2013 Plan”). The October 2013 plan includes a reduction of 1% of our worldwide workforce. The October 2013 plan was completed during fiscal year 2014. 

49

 

 


 

In the third quarter of fiscal year 2013, we adopted a rebalancing plan (the “July 2013 plan”) to better align our operating expenses with strategic growth areas for the purpose of improving competitiveness and execution across the business. The July 2013 plan included a reduction in our worldwide workforce of 12%, which has been gradually offset by the addition of new hires in design and development during 2014.  We may incur additional expenses related to leases we exited under this plan, in the event the estimated fair value of liability associated with these leases increases due to changes in estimates.

In the first quarter of fiscal year 2013, we adopted a restructuring plan (the “February 2013 plan”) to prioritize our sales and development efforts, strengthen financial performance and improve cash flow. The February 2013 plan included a reduction of 18% of our worldwide workforce. The February 2013 restructuring plan was completed at the end of fiscal 2013..

During fiscal year 2012, we initiated restructuring plans to reorganize certain operations and reduce our global workforce and other operating costs. The 2012 restructuring plans were substantially completed at the end of the fourth quarter of 2012.

The amounts below relating to the restructuring plans are included in other accrued expenses and liabilities on the balance sheet. Activity during fiscal 2014 primarily related to the July 2013 plan (in thousands):

 

 

 

 

Balance as of January 3, 2014

$

6,063 

Costs incurred / (adjustments)

 

 

Severance costs

 

(138)

Lease exit costs

 

604 

Other costs        

 

53 

Cash payments

 

 

Severance payments

 

(4,748)

Lease exit payments

 

(1,020)

Other payments

 

(76)

Balance as of January 2, 2015

$

738 

 

 

NOTE 9—INCOME TAXES

We are subject to filing requirements in the United States Federal jurisdiction and in many state and foreign jurisdictions for numerous consolidated and separate entity income tax returns. We are no longer subject to examination in the U.S. for years prior to 2013.  

Income (loss) before income taxes is allocated between domestic and foreign jurisdictions as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

January 2, 2015

 

January 3, 2014

 

December 28, 2012

 

 

 

 

 

 

 

 

 

Domestic

$

51,959 

 

$

22,140 

 

$

12,394 

Foreign

 

22,574 

 

 

(8,263)

 

 

(20,060)

Income (loss) before income taxes

$

74,533 

 

$

13,877 

 

$

(7,666)

 

50

 

 


 

Income tax expense—The provision for income taxes is summarized below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

January 2, 2015

 

January 3, 2014

 

December 28, 2012

Current taxes:

 

 

 

 

 

 

 

 

Federal

$

(14,366)

 

$

(2,090)

 

$

10,300 

State

 

(865)

 

 

34 

 

 

3,638 

Foreign

 

(617)

 

 

2,879 

 

 

2,042 

 

 

(15,848)

 

 

823 

 

 

15,980 

Deferred taxes:

 

 

 

 

 

 

 

 

Federal

 

23,337 

 

 

11,911 

 

 

20,329 

State

 

2,536 

 

 

545 

 

 

(4,871)

Foreign

 

9,696 

 

 

(2,257)

 

 

(1,455)

 

 

35,569 

 

 

10,199 

 

 

14,003 

Income tax expense

$

19,721 

 

$

11,022 

 

$

29,983 

 

As a result of the exercise of non-qualified Options, the disqualifying disposition of incentive Options, the release of Awards and the disqualifying disposition of shares acquired under the ESPP, we realized tax benefits of $2.4 million, $1.3 million and $1.6 million during fiscal years 2014, 2013 and 2012, respectively.

 

We currently have a tax holiday in Malaysia resulting in a tax rate of 0%. This tax holiday began on July 1, 2009, and terminates on July 1, 2019. The table below summarizes the effects of operating in Malaysia under our tax holiday based on the Malaysian statutory tax rate (in thousands, except per share data).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

January 2, 2015

 

January 3, 2014

 

December 28, 2012

 

 

 

 

 

 

 

 

 

Tax effects from earnings / (losses) attributable to Malaysia

$

5,611 

 

$

(2,483)

 

$

(5,132)

 

 

 

 

 

 

 

 

 

Effect on earnings (loss) per share:

 

 

 

 

 

 

 

 

Basic

$

0.04 

 

$

(0.02)

 

$

(0.04)

Diluted

$

0.04 

 

$

(0.02)

 

$

(0.04)

 

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Deferred income taxes—The components of net deferred income tax assets and liabilities are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of January 2, 2015

 

As of January 3, 2014

 

 

Current

 

 

Non-Current

 

 

Current

 

 

Non-Current

Inventory

$

14,170 

 

$

 

$

14,561 

 

$

Property, plant and equipment

 

 

 

4,158 

 

 

 

 

3,445 

Accrued expenses

 

4,869 

 

 

 

 

5,343 

 

 

Equity-based compensation

 

 

 

6,561 

 

 

 

 

8,095 

Net operating loss carryforward

 

1,025 

 

 

19,766 

 

 

1,285 

 

 

23,327 

Capitalized research and development

 

 

 

797 

 

 

 

 

2,142 

Deferred compensation

 

 

 

3,187 

 

 

 

 

3,477 

Deferred revenue

 

4,179 

 

 

 

 

4,285 

 

 

Tax credits

 

 

 

39,122 

 

 

7,483 

 

 

52,262 

Capital loss carryforward

 

 

 

6,628 

 

 

 

 

7,263 

Other, net

 

458 

 

 

3,824 

 

 

480 

 

 

4,388 

Deferred tax assets

 

24,701 

 

 

84,043 

 

 

33,437 

 

 

104,399 

Valuation allowance

 

(4,268)

 

 

(44,709)

 

 

(11,109)

 

 

(31,391)

Net deferred tax assets

$

20,433 

 

$

39,334 

 

$

22,328 

 

$

73,008 

 

The table below summarizes the activity in valuation allowances (in thousands):

 

 

 

 

 

 

 

 

 

 

As of January 2, 2015

 

As of January 3, 2014

Beginning balance

$

42,500 

 

$

44,156 

(Decreases) related to state attributes

 

(48)

 

 

(1,537)

Increases related to foreign net operating losses

 

7,160 

 

 

Decreases related to capital losses

 

(635)

 

 

(119)

Ending balance

$

48,977 

 

$

42,500 

 

During the fiscal year ended January 2, 2015, we reduced our deferred tax assets by $0.6 million related to capital losses for expirations. The valuation allowances were also adjusted accordingly based on the deferred tax asset adjustments.

 

During the fiscal year ended January 2, 2015, we established a valuation allowance for the deferred tax assets attributable to the net operating losses (“NOLs”) for a foreign subsidiary. As of January 2, 2015 the said foreign subsidiary had net deferred tax assets of $7.2 million attributable to NOLs.  Based upon an analysis of projected future taxable income, we have determined that we would not be able to generate income in the said foreign subsidiary to utilize the NOLs and as such determined that a full valuation allowance was required.  We completed an analysis of projected future taxable income and determined that all remaining deferred tax assets, including NOLs and tax-credit carryforwards, are more likely than not to be realized in the foreseeable future. Therefore, we have not provided any additional valuation allowances on deferred tax assets as of January 2, 2015.

 

We have gross NOLs of $38.8 million from acquisitions that expire in tax years 2027 through 2028. The annual utilization of these NOLs is limited pursuant to Internal Revenue Code Section 382. We have gross federal R&D credit carryforwards of $13.8 million that will expire in tax years 2032 through 2034.

 

During the quarter ended April 4, 2014, we adopted Accounting Standards Update (ASU) No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists ("ASU 2013-11"). ASU 2013-11 clarifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. Adoption of this standard resulted in a $15.4 million decrease to our deferred tax assets and income tax payable during the fiscal year ended January 2, 2015.

 

52

 

 


 

Income Tax Rate Reconciliation—A reconciliation of the statutory United States income tax to our effective income tax is as follows ($ in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

 

January 2, 2015

 

 

January 3,

2014

 

 

December 28, 2012

 

Statutory U.S. income tax rate

 

35.0 

%

 

 

35.0 

%

 

 

35.0 

%

Income tax provision reconciliation:

 

 

 

 

 

 

 

 

 

 

 

Tax at federal statutory income tax rate

$

26,087 

 

 

$

4,857 

 

 

$

(2,683)

 

State taxes

 

1,356 

 

 

 

1,198 

 

 

 

997 

 

(Benefit) / Cost of earnings subject to tax rates other than U.S.

 

(7,918)

 

 

 

3,505 

 

 

 

7,293 

 

International equity-based compensation

 

748 

 

 

 

2,422 

 

 

 

2,951 

 

Research credits

 

(4,608)

 

 

 

(10,313)

 

 

 

(3,910)

 

Change in unrecognized tax benefits

 

2,765 

 

 

 

116 

 

 

 

20,675 

 

Subpart F—interest & stock gain

 

437 

 

 

 

326 

 

 

 

621 

 

Manufacturing deduction

 

(675)

 

 

 

(370)

 

 

 

(100)

 

Amortization of deferred tax charge

 

(2,964)

 

 

 

(2,964)

 

 

 

(2,967)

 

Tax shortfalls on share based compensation

 

1,381 

 

 

 

3,277 

 

 

 

 

Export compliance settlement

 

1,400 

 

 

 

2,100 

 

 

 

 

Interest

 

 

 

 

779 

 

 

 

 

Royalty income

 

5,215 

 

 

 

5,557 

 

 

 

6,504 

 

Other items

 

(3,503)

 

 

 

532 

 

 

 

602 

 

Total income tax provision

$

19,721 

 

 

$

11,022 

 

 

$

29,983 

 

 

Uncertain Tax Positions and Uncertain Tax Benefits (“UTBs”)

 

During fiscal 2014, we recorded an increase of $0.4 million of potential interest and penalties on UTBs in the consolidated statement of operations. During fiscal 2013, we recorded an increase of $1.8 million of potential interest on UTBs in the consolidated statement of operations. During fiscal 2012, we recorded a reduction of $6.1 million of potential interest and a reduction of $0.6 million of potential penalties on UTBs in the consolidated statement of operations.

 

The table below summarizes activity in gross UTBs (in thousands):

 

 

 

 

 

 

 

 

As of January 2, 2015

 

As of January 3, 2014

Beginning balance (includes interest and penalties of $7,102 thousand as of January 3, 2014

$

99,343 

 

$

112,867 

Increases related to current year tax positions

 

1,152 

 

 

1,157 

Increases related to prior year tax positions

 

2,515 

 

 

10,874 

Settlements with tax authorities

 

(24,804)

 

 

(25,555)

Ending balance (includes $7,538 thousand of interest and penalties as of January 2, 2015)

$

78,206 

 

$

99,343 

 

The increases related to prior fiscal year tax positions in fiscal 2014 were primarily due to accrued interest on the UTBs.  The increases related to current fiscal year tax positions do not have a material impact on the effective tax rate.

 

During fiscal 2014, we reached final settlement with the IRS in connection with the 2010 – 2012 examination periods. As a result of the settlement, we reduced our UTB balance by $16.4 million. This reduction included a $5.6 million cash payment to the IRS for additional tax, a $4.2 million decrease in deferred tax assets related to federal R&D tax credits, and a $6.6 million reduction to tax expense.  Also during fiscal 2014, we reached final settlement with Swiss tax authorities in connection with the 2009 – 2012 examination periods.  We decreased our UTBs in the amount of $7.5 million.  This reduction included a $2.7 million cash payment consisting of $2.4 million of additional tax and $0.3 million of interest and a $4.8 million decrease in deferred tax assets related to utilization of a net operating loss attribute.  During fiscal year 2014, we made cash payments of $0.3 million to various states related to the 2008 – 2009 IRS settlement.  During fiscal year 2014, we made cash payments of $0.6 million to various states related to the 2005-2007 IRS settlement.

 

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Within the next 12 months, we estimate that our UTB balance will be reduced by $0.1 million related to the state tax impact of the settlement with the IRS for tax years 2005 – 2007, $0.3 million related to the state tax impact of the settlement with the IRS for tax years 2008 – 2009, and $2.5 million related to the state tax impact of the settlement with the IRS for tax years 2010 – 2011.

 

We believe events that could occur in the next 12 months and cause a material change in unrecognized tax benefits include, but are not limited to, the following:

·

completion of examinations by the U.S. or foreign taxing authorities; and

·

expiration of statute of limitations on our tax returns.

 

The calculation of unrecognized tax benefits involves dealing with uncertainties in the application of complex global tax regulations.  We regularly assess our tax positions in light of legislative, bilateral tax treaty, regulatory, tax holiday arrangements and judicial developments in the countries in which we do business. We believe it is reasonably possible that we may recognize approximately $20 million of our existing unrecognized tax benefits within the next twelve months as a result of the lapse of statutes of limitations and the resolution of agreements with domestic and various foreign tax authorities.

 

Other Income Tax Information

 

Income taxes paid were $29.0 million, $16.6 million and $49.4 million during fiscal years 2014, 2013 and 2012, respectively. Interest and penalties paid were $0.5 million during fiscal 2014, $0.9 million during fiscal 2013, and $13.5 million during fiscal 2012.

 

We have not provided U.S. income taxes on $366.8 million of accumulated undistributed earnings of our international subsidiaries because of our demonstrated intention to permanently reinvest these earnings. Should these earnings be remitted to the U.S. we would be subject to additional U.S. taxes and foreign withholding taxes. Determining the unrecognized deferred tax liability related to investments in these international subsidiaries that are permanently reinvested is not practicable and not expected in the foreseeable future.

 

Hypothetical Additional Paid in Capital (“APIC”) Pool—The hypothetical APIC pool represents the excess tax benefits related to share-based compensation that are available to absorb future tax deficiencies.  If the amount of tax deficiencies is greater than the available hypothetical APIC pool, we record the excess as income tax expense in our consolidated statements of operations.  We recognized $1.4 million and $3.3 million of income tax expense resulting from tax deficiencies related to equity-based compensation in our consolidated statements of operations during fiscal years 2014 and 2013, respectively. We did not recognize any tax expense resulting from tax deficiencies during 2012.

 

NOTE 10—LONG-TERM DEBT

On September 1, 2011, we established a new five-year, $325.0 million revolving credit facility (the “Facility”). This Facility replaced our previous $300.0 million six-year term-loan facility and $75.0 million revolving credit facility. The Facility matures on September 1, 2016 and is payable in full upon maturity. We may request to increase the Facility by up to $75.0 million. 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 is secured by a first priority lien and security interest in (a) all of the equity interests and intercompany debt of our direct and indirect subsidiaries, except, in the case of foreign subsidiaries, to the extent that such pledge would be prohibited by applicable law or would result in adverse tax consequences, (b) all of our present and future tangible and intangible assets and our direct and indirect subsidiaries (other than immaterial subsidiaries and foreign subsidiaries) and (c) all proceeds and products of the property and assets described in clauses (a) and (b) above. Our obligations under the Facility are guaranteed by our direct and indirect wholly-owned subsidiaries (other than immaterial subsidiaries and foreign subsidiaries).

At our option, loans under the Facility will bear stated interest based on the Base Rate or Eurocurrency Rate, in each case plus the Applicable Rate (respectively, as defined in the credit agreement (the “Credit Agreement”), as amended governing the facility in Exhibit 10.1). The Base Rate will be, for any day, a fluctuating rate per annum equal to the highest of (a) 1/2 of 1.00% per annum above the Federal Funds Rate (as defined in the Credit Agreement), (b) Bank of America’s prime rate and (c) the Eurodollar Rate for a term of one month plus 1.00%. Eurodollar borrowings may be for one,  two,  three or six months (or such period that is 12 months or less, requested by Intersil and consented to by all the Lenders) and will be at an annual rate equal to the period-applicable Eurodollar Rate plus the Applicable Rate. The Applicable Rate for all revolving loans is based on a pricing grid ranging from 0.75% to 1.75% per

54

 

 


 

annum for Base Rate loans and 1.75% to 2.75% for Eurocurrency Rate loans based on Intersil’s Consolidated Leverage Ratio (as defined in the Credit Agreement). 

During the fiscal year ended December 28, 2012, we obtained two amendments to the Facility which further revised the requirements of certain debt covenants. We incurred fees related to the amendments of approximately $0.9 million, which have also been capitalized as part of the debt issuance costs.

We did not have any outstanding borrowings against the Facility as of January 2, 2015 or January 3, 2014.

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

 

December 28, 2012

 

 

(in thousands)

 

Cash paid for interest

$

3,907 

 

Weighted-average interest rate (pre-tax)

 

2.48 

%

 

Letters of Credit: We issue letters of credit during the ordinary course of business through major financial institutions as required by certain vendor contracts. We had outstanding letters of credit totaling $1.4 million as of January 2, 2015 and January 3, 2014. The standby letters of credit are secured by pledged deposits.

NOTE 11—INCOME FROM INTELLECTUAL PROPERTY (“IP”) AGREEMENTS

During the fourth quarter ended December 28, 2012, we recorded income of $1.0 million related to the sale of several patents. During the third quarter of fiscal year 2012, we recorded proceeds of $20.0 million, net of $6.6 million of legal costs, related to an IP agreement settling a trade secret misappropriation and patent infringement dispute with another semiconductor company.

 

NOTE 12—COMMON STOCK AND DIVIDENDS

Common Stock—Intersil shareholders approved an Amended and Restated Certificate of Incorporation in 2005 that restated authorized capital stock to consist of 600 million shares of Intersil Class A common stock, par value $0.01 per share, and two million shares of preferred stock. Holders of Class A common stock are entitled to one vote for each share held. The Board of Directors has broad discretionary authority to designate the terms of the preferred stock should it be issued. As of January 2, 2015 and January 3, 2014, no shares of preferred stock were outstanding.

The table below summarizes the Class A common stock activity for all periods presented (in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

January 2,

2015

 

January 3,

2014

 

December 28, 2012

Beginning balance

 

127,715 

 

 

126,250 

 

 

126,483 

Shares issued under stock plans, net of shares withheld for taxes

 

2,502 

 

 

1,465 

 

 

1,667 

Repurchase and retirement of common stock

 

 

 

 

 

(1,900)

Ending balance

 

130,217 

 

 

127,715 

 

 

126,250 

Dividends paid to shareholders

$

61,960 

 

$

61,025 

 

$

60,955 

Dividends paid per share

$

0.48 

 

$

0.48 

 

$

0.48 

 

Dividends—We have paid a quarterly dividend since September 2003. In January 2015, the Board of Directors declared a dividend of $0.12 per share to be paid in the first quarter of 2015, which if annualized equates to $0.48 per share. Dividends in the future will be declared at the discretion of the Board of Directors upon consideration of business conditions, liquidity and outlook.

NOTE 13RISKS AND UNCERTAINTIES

Financial instruments - Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash equivalents, investments, accounts receivable and derivatives. We continually monitor our positions with and the credit quality

55

 

 


 

of the governmental and financial institutions that issue our cash equivalents and investments. By policy, we limit our exposure to long-term investments and mitigate the credit risk through diversification and adherence to a policy requiring the purchase of highly-rated securities. In addition, we limit the amount of investment credit exposure with any one issuer. For foreign exchange contracts, we manage potential credit exposure primarily by restricting transactions with only high-credit quality counterparties.

We market our products for sale to customers, including distributors, primarily in Asia and the United States. We extend credit based on an evaluation of the customer’s financial condition and we generally do not require collateral.

Concentration of Operational Risk—We market our products for sale to customers, including distributors, primarily in Asia, Europe and the United States. We extend credit based on an evaluation of the customer’s financial condition and we generally do not require collateral. The table below shows revenue by country where such value exceeded 10% in any one year:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

2014

 

2013

 

2012

Revenue by country

 

 

 

 

 

 

 

 

 

 

 

China

 

50.9 

%

 

 

52.9 

%

 

 

55.4 

%

United States

 

18.1 

%

 

 

15.7 

%

 

 

14.0 

%

 

In addition to those in the table above, our customers in each of Korea, Japan, Germany, Singapore, Taiwan, and Thailand, accounted for at least 1% of our total revenue in fiscal year 2014.

One distributor, Avnet, Inc. (“Avnet”), represented 18.4%, 17.0%, and 14.9% of revenue during fiscal years 2014, 2013 and 2012 respectively and 24.4% and 24.6% of trade receivables as of January 2, 2015 and January 3, 2014, respectively. Another distributor, WPG Holdings Ltd. (“WPG”), represented 10.8%, 12.2%, and 12.8% of revenue during fiscal years 2014, 2013 and 2012 respectively and a 7.7% and 13.8% of accounts receivable as of January 2, 2015 and January 3, 2014, respectively.

We relied on external vendors for 86.9% of our wafer supply as measured in units during fiscal 2014. Additionally, we rely primarily on external vendors for test, assembly and packaging services. The test, assembly and packaging vendors we utilize are mostly located in Asia, where a significant volume of our final product sales are made. 

Geographic Information—The following table presents net revenue and long-lived asset information based on geographic region. Net revenue is based on the geographic location of the distributors, original equipment manufacturers or contract manufacturers who purchased our products, which may differ from the geographic location of the end customers. Long-lived assets include property, plant and equipment and are based on the physical location of the assets (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

 

2014

 

2013

 

2012

United States operations

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

101,268 

 

 

$

90,348 

 

 

$

85,356 

 

Tangible long-lived assets

$

55,681 

 

 

$

59,469 

 

 

$

54,048 

 

International operations

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

461,287 

 

 

$

484,847 

 

 

$

522,508 

 

Tangible long-lived assets

$

16,591 

 

 

$

22,398 

 

 

$

31,326 

 

 

Concentration of other risks - The semiconductor industry is characterized by rapid technological change, competitive pricing pressures, and cyclical market patterns. Our results of operations are affected by a wide variety of factors, including general economic conditions; economic conditions specific to the semiconductor industry; demand for our products; the timely introduction of new products; implementation of new manufacturing technologies; manufacturing capacity; the availability and cost of materials and supplies; competition; the ability to safeguard patents and intellectual property in a rapidly evolving market; and reliance on assembly and manufacturing foundries, independent distributors and sales representatives. As a result, we may experience substantial period-to-period fluctuations in future operating results due to the factors mentioned above or other factors.

 

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NOTE 14—EARNINGS (LOSS) PER SHARE

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

January 2, 2015

 

January 3, 2014

 

December 28, 2012

Numerator:

 

 

 

 

 

 

 

 

Net income (loss) to common shareholders

$

54,812 

 

$

2,855 

 

$

(37,649)

Denominator:

 

 

 

 

 

 

 

 

Denominator for basic earnings (loss) per share—weighted average common shares

 

129,149 

 

 

127,151 

 

 

127,032 

Effect of stock options and awards

 

3,508 

 

 

847 

 

 

Denominator for diluted earnings (loss) per share—adjusted weighted average common shares

 

132,657 

 

 

127,998 

 

 

127,032 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

Basic

$

0.42 

 

$

0.02 

 

$

(0.30)

Diluted

$

0.41 

 

$

0.02 

 

$

(0.30)

Anti-dilutive shares not included in the above calculations:

 

 

 

 

 

 

 

 

Awards

 

242 

 

 

1,181 

 

 

3,367 

Options

 

1,128 

 

 

6,774 

 

 

11,946 

 

 

NOTE 15—EQUITY-BASED COMPENSATION

Our equity compensation plans are summarized below (in thousands):

 

 

 

 

 

 

 

 

 

 

Equity Compensation Arrangement

Total Number of Shares in Arrangement

 

Shares Outstanding as of January 2, 2015

 

Shares Available for Issuance at  January 2, 2015

1999 Plan

 

36,250 

 

 

196 

 

 

2008 Plan

 

46,229 

 

 

9,219 

 

 

18,096 

2009 Option Exchange Plan

 

2,914 

 

 

894 

 

 

Inducement Plan

 

433 

 

 

325 

 

 

ESPP

 

9,033 

 

 

 

 

2,989 

 

 

94,859 

 

 

10,634 

 

 

21,085 

 

Grant Date Fair Values and Underlying Assumptions; Contractual Terms

For Options granted in fiscal years 2014 and 2013, we estimated the fair value of each Option as of the date of grant with the following assumptions:

 

 

 

 

 

 

 

 

 

 

Year Ended

 

January 2, 2015

 

January 3, 2014

Expected volatilities

32.2%

 

38.2%

Dividend yields

3.6%

 

5.7%

Risk-free interest rate

0.8%

 

0.6%

Expected lives, in years

2.6

 

2.6

 

The following table represents the weighted-average fair value compensation cost per share of Options and Awards granted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

January 2, 2015

 

January 3, 2014

 

December 28, 2012

Options

$

2.18 

 

$

1.67 

 

$

2.55 

57

 

 


 

Awards 

$

13.12 

 

$

8.58 

 

$

9.14 

Aggregate

$

12.76 

 

$

7.94 

 

$

5.62 

 

Information Regarding Options and Awards—Information about Options and Awards as of January 2, 2015 and activity for Options and Awards for the three fiscal years then ended is presented below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options

 

 

Awards

 

Aggregate information

 

Shares

 

Weighted-average exercise price

 

Weighted-average remaining contract lives

 

 

Shares

 

Aggregate intrinsic value

 

 

Aggregate unrecognized compensation cost

 

(in thousands)

 

 

(per share)

 

(in years)

 

 

(in thousands)

 

 

(in thousands)

 

 

(in thousands)

Outstanding as of December 30, 2011

13,948 

 

$

16.21 

 

4.1 

 

 

3,678 

 

 

 

 

 

 

Granted (1)

2,420 

 

 

10.47 

 

 

 

 

2,117 

 

 

 

 

 

 

Exercised (4)

(85)

 

 

6.48 

 

 

 

 

(1,164)

 

 

 

 

 

 

Canceled

(4,337)

 

 

16.79 

 

 

 

 

(1,264)

 

 

 

 

 

 

Outstanding as of December 28, 2012

11,946 

 

$

14.90 

 

3.7 

 

 

3,367 

 

 

 

 

 

 

Granted (2)

340 

 

 

8.38 

 

 

 

 

3,334 

 

 

 

 

 

 

Exercised (4)

(106)

 

 

8.34 

 

 

 

 

(931)

 

 

 

 

 

 

Canceled

(4,684)

 

 

16.89 

 

 

 

 

(1,166)

 

 

 

 

 

 

Outstanding as of January 3, 2014

7,496 

 

$

13.46 

 

3.3 

 

 

4,604 

 

 

 

 

 

 

Granted (3)

70 

 

 

13.45 

 

6.8 

 

 

2,109 

 

 

 

 

 

 

Exercised (4)

(1,205)

 

 

12.36 

 

3.1 

 

 

(1,153)

 

 

 

 

 

 

Canceled

(978)

 

 

19.28 

 

0.7 

 

 

(309)

 

 

 

 

 

 

Outstanding as of January 2, 2015

5,383 

 

$

12.65 

 

2.9 

 

 

5,251 

 

$

91,358 

 

$

30,454 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of January 2, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable/vested (4)

4,667 

 

$

12.86 

 

2.7 

 

 

67 

 

$

12,596 

 

 

 

Vested and expected to vest

5,277 

 

$

12.69 

 

2.9 

 

 

3,986 

 

$

72,327 

 

 

 

 

 

(1)

Grants include 833,204 MSU Options and 380,821 MSU Awards issued in fiscal 2012.

(2)

Grants include 784,000 MSU Awards issued in fiscal 2013.

(3)

Grans include 433,564 MSU Awards issued in fiscal 2014.

(4)

Awards exercised are those that have reached full vested status and been delivered to the recipients as a taxable event due to elective deferral available in the case of deferred stock units. Deferred stock units for which the deferral is elected timely are vested but still outstanding as Awards. Total un-issued shares related to deferred stock units as of January 2, 2015, were 66,670 shares as shown in the Awards column as Exercisable/vested.

The weighted-average recognition period for the compensation cost is 3.5 years. The unrecognized compensation cost is expected to be recognized over a period of 1.5 years.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional Disclosures

Year Ended

 

January 2, 2015

 

January 3, 2014

 

December 28, 2012

 

 

 

 

 

 

 

 

 

 

 

($ in thousands, share data in thousands)

Shares issued under the employee stock purchase plan

 

495 

 

 

712 

 

 

813 

Aggregate intrinsic value of stock options exercised

$

2,445 

 

$

175 

 

$

281 

 

58

 

 


 

The following table is a summary of the number and weighted-average grant date fair values regarding our unexercisable/unvested Options and Awards as of January 2, 2015 and activity during the fiscal year then ended (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Options Unvested

 

Options-Weighted Average Grant Date Fair Values

 

Awards Unvested

 

Awards-Weighted Average Grant Date Fair Values

Unvested as of January 3, 2014

1,355 

 

$

2.86 

 

4,530 

 

$

9.53 

Granted

70 

 

 

2.18 

 

2,109 

 

 

13.12 

Vested

(614)

 

 

3.15 

 

(1,146)

 

 

11.52 

Forfeited

(94)

 

 

2.97 

 

(309)

 

 

10.24 

Unvested as of January 2, 2015

717 

 

$

2.86 

 

5,184 

 

$

10.51 

 

Financial Statement Effects and Presentation—The following table shows total equity-based compensation expense for the periods indicated that are included in the accompanying Consolidated Statements of Operations (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

January 2, 2015

 

January 3, 2014

 

December 28, 2012

By statement of operations line item

 

 

 

 

 

 

 

 

Cost of revenue

$

1,326 

 

$

1,387 

 

$

1,634 

Research and development

$

8,468 

 

$

7,777 

 

$

11,304 

Selling, general and administrative

$

8,894 

 

$

9,927 

 

$

11,670 

By stock type

 

 

 

 

 

 

 

 

Stock options

$

1,189 

 

$

4,690 

 

$

9,426 

Restricted and deferred stock awards

$

16,493 

 

$

13,378 

 

$

14,037 

Employee stock purchase plan

$

1,006 

 

$

1,023 

 

$

1,145 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of January 2, 2015

 

 

As of January 03, 2014

 

 

 

 

 

(in thousands)

Equity-based compensation capitalized in inventory

 

 

 

$

 

$

341 

 

Market and Performance-based Grants — As of January 2, 2015, we had Options and Awards outstanding that include the usual service conditions as well as (1) market conditions related to total shareholder return and (2) performance conditions relating to revenue and operating income relative to peer companies. Under the terms of the agreements, participants may receive from 0 - 200% of the original grant. Equity-based compensation cost is measured at the grant date, based on the fair value of the number of shares ultimately expected to vest, and is recognized as an expense, on a straight line basis, over the requisite service period (shares in thousands):

 

 

 

 

 

 

 

 

 

As of January 2, 2015

 

Options

 

Awards

 

 

 

 

 

(in thousands)

Performance and market-based units outstanding

368 

 

1,343 

Maximum shares that could be issued assuming the highest level of performance

551 

 

2,396 

Performance and market-based shares expected to vest

208 

 

1,768 

Amount to be recognized as compensation cost over the performance period

1,510 

 

10,616 

 

 

59

 

 


 

NOTE 16—COMMITMENTS AND CONTINGENCIES

Indemnifications—The Harris Corporation (“Harris”) facilities in Palm Bay, Florida, are listed on the National Priorities List (“NPL”) for groundwater clean-up under the Comprehensive Environmental Response, Compensation and Liabilities Act, or Superfund. Intersil’s adjacent facility is included in the listing since it was owned by Harris at the time of the listing. Remediation activities associated with the NPL site have ceased. However, Harris is still obligated to conduct groundwater monitoring on the affected property for an unspecified period of time. Harris has indemnified Intersil against any environmental liabilities associated with this contamination. This indemnification does not expire, nor does it have a maximum amount.

A former semiconductor manufacturing site in Taoyuan, Taiwan operated by RCA and/or General Electric allegedly has groundwater contamination and is subject to cleanup and monitoring efforts as well as claims of environmental pollution that allegedly caused adverse health effects. To the extent our Taiwan subsidiary is the successor in interest to any of RCA or General Electric’s activities at that site, Harris has indemnified Intersil against any environmental liabilities associated with the alleged contamination. This indemnification does not expire, nor does it have a maximum amount.

We generally provide customers with a limited indemnification against intellectual property infringement claims related to our products. We accrue for known indemnification issues if a loss is probable and can be reasonably estimated, and accrue for estimated incurred but unidentified issues based on historical activity.

In certain instances when we sell product groups, we may retain certain liabilities for known exposures and provide indemnification to the buyer with respect to future claims arising from events occurring prior to the sale date, including liabilities for taxes, legal matters, intellectual property infringement, environmental exposures and other obligations. The terms of the indemnifications vary in duration, from one to two years for certain types of indemnities, to terms for tax indemnifications that are generally aligned to the applicable statute of limitations for the jurisdiction in which the divestiture occurred, and terms for environmental indemnities that typically do not expire. The maximum potential future payments that we could be required to make under these indemnifications are either contractually limited to a specified amount or unlimited. We believe that the maximum potential future payments that we could be required to make under these indemnifications are not determinable at this time, as any future payments would be dependent on the type and extent of the related claims, and all available defenses, which are not estimable. 

Leases and Commitments—Total rental expense amounted to $7.7 million, $8.8 million, and $11.0 million for 2014, 2013 and 2012, respectively. Future minimum lease commitments under non-cancelable operating leases primarily related to land and office buildings amounted to $33.1 million as of January 2, 2015.

The following table sets forth future minimum lease commitments and non-cancelable purchase commitments as of January 2, 2015 (in thousands):

 

 

 

 

 

 

 

 

Future minimum lease commitments

 

Non-cancelable purchase commitments

2015

$

7,704 

 

$

98,587 

2016

 

6,969 

 

 

985 

2017

 

6,329 

 

 

2,399 

2018

 

6,031 

 

 

1,237 

Thereafter

 

6,033 

 

 

513 

Total future minimum commitments

$

33,066 

 

$

103,721 

 

 

NOTE 17—LITIGATION MATTERS

A portion of our activities are subject to export control regulations by the U.S. Department of State (“DOS”) under the U.S. Arms Export Control Act (AECA) and International Traffic in Arms Regulations (ITAR 22 CFR 120-130). In September 2010, in response to a request for information, we disclosed to the Directorate of Defense Trade Controls (DDTC) information concerning export activities for the time frame 2005 through 2010. The DOS administers the DDTC authority under ITAR 22 CFR 120-130 to impose civil penalties and other administrative sanctions for violations, including debarment from engaging in the exporting of defense articles. In June of 2013, DDTC notified us of potential violations of the ITAR and that it was considering pursuing administrative

60

 

 


 

proceedings under Part 128 of the ITAR.  On June 16, 2014, we entered into a Consent Agreement (the “Agreement”) with the Office of Defense Trade Controls Compliance (“DTCC”), Bureau of Political-Military Affairs, DOS for the purpose of resolving the ITAR compliance matter. The Agreement has a two-year term and provides for: (i) payment of an aggregate civil penalty of $10 million, $4 million of which is suspended and eligible for 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 Agreement and U.S. export control regulations; (iii) two external audits of the Company’s 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 settlement, we estimated and recorded a $6 million charge in the fiscal quarter ended October 4, 2013 and an additional $4 million charge in the fiscal quarter ended April 4, 2014 when the amount of the penalty was determined. The $6 million portion of the settlement that is not subject to suspension will be paid in installments, with $3 million paid in June 2014, and $3 million payable in June 2015. We expect that investments made in its export control compliance program will be eligible for credit against the suspended portion of the settlement amount, which include: additional staffing, ongoing implementation of a new software system, employee training, and establishment of a regular compliance audit program and corrective action process.  We also expect that these investments in remedial compliance measures will be sufficient to cover the $4 million suspended payment.

 

Texas Advanced Optoelectronic Solutions, Inc. (“TAOS”) named Intersil as a defendant in a lawsuit filed on November 25, 2008, in the United States District Court for the Eastern District of Texas. Discovery has been completed, and a jury trial for the case is under way. In this action, TAOS alleges patent infringement, breach of contract, trade secret misappropriation, and tortious interference with a business relationship, and has stated during trial that it is seeking in the range of $49 million in compensatory damages, and exemplary damages, costs and interest in an unspecified amount as well as injunctive relief. We dispute TAOS’ claims, which we believe are without merit, and are defending ourselves vigorously. Given the unpredictable nature of this type of litigation and because the outcome remains subject to appeal, there is significant uncertainty regarding the ultimate outcome of this lawsuit. 

 

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

We do not believe, based on currently available facts and circumstances, that the ultimate outcome of these matters, individually and in the aggregate will have a material adverse effect on our financial position or overall trends in results of our operations. During the periods presented we have not recorded any accrual for loss contingencies associated with any legal proceedings, nor determined that an unfavorable outcome is probable. As a result, no amounts have been accrued or disclosed in the accompanying consolidated financial statements with respect to these legal proceedings, as potential losses for such matters are not considered probable. 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.

 

 

61

 

 


 

NOTE 18—QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is a summary of unaudited quarterly financial information for the periods indicated (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarters Ended

 

Jan 2, 2015

 

Oct 3, 2014

 

Jul 4, 2014

 

Apr 4, 2014

 

Jan 3, 2014

 

Oct 4, 2013

 

Jul 5, 2013

 

Mar 29, 2013

Revenue

$  131,126

 

$  143,612

 

$  147,761

 

$   140,056

 

$  145,993

 

$  152,644

 

$  144,834

 

$   131,724

Gross profit

78,193 

 

83,849 

 

85,808 

 

78,905 

 

81,145 

 

84,636 

 

79,893 

 

70,933 

Net income (loss)

17,274 

 

13,887 

 

13,646 

 

10,005 

 

7,508 

 

(8,178)

 

1,002 

 

2,522 

Income (loss) per share (basic):

0.13 

 

0.11 

 

0.11 

 

0.08 

 

0.06 

 

(0.06)

 

0.01 

 

0.02 

Income (loss) per share (diluted):

0.13 

 

0.10 

 

0.10 

 

0.08 

 

0.06 

 

(0.06)

 

0.01 

 

0.02 

 

—End of Consolidated Financial Statements—

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Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

Item 9A.Controls and Procedures.

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(c) of the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K.

Based on this evaluation, our CEO and CFO concluded that, as of the end of the period covered by this Annual Report on Form 10-K, 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 in providing reasonable assurance that all material information required to be disclosed by Intersil in the reports that it files or furnishes under the Securities Exchange Act of 1934, as amended (the ”Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (“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.

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

Management Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of company assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of company assets that could have a material effect on the financial statements.

On May 14, 2013, the Committee of Sponsoring Organizations of the Treadway Commission issued an updated version of its Internal Control - Integrated Framework ("2013 Framework"). Originally issued in 1992 ("1992 Framework"), both frameworks provide principles-based guidance for designing and implementing effective internal controls. As of January 2, 2015, the Company continues to utilize the 1992 Framework. Management has compared our internal controls implemented under the COSO 1992 framework to the newly issued COSO 2013 framework and determined based on our business no material gaps exist in internal control.

 

Management assessed our internal control over financial reporting as of January 2, 2015, the end of our fiscal year. Management based its assessment on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework). Management believes that the COSO framework is a suitable framework for its evaluation of our internal control over financial reporting because it is free from bias, permits reasonably qualitative and quantitative measurements of our internal controls, is sufficiently complete so that those relevant factors that would alter a conclusion about the effectiveness of our internal controls are not omitted and is relevant to an evaluation of internal control over financial reporting. Management’s assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. This assessment is supported by testing and monitoring by our management and Internal Audit organizations.

Based on this assessment, management has concluded that our internal control over financial reporting was effective as of the end of the fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial

63

 

 


 

statements for external reporting purposes in accordance with generally accepted accounting principles. Furthermore, management has concluded that no change in internal control over financial reporting occurred during Intersil’s fourth quarter ended January 2, 2015 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of our Board of Directors. The effectiveness of our internal control over financial reporting as of January 2, 2015 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in its report which is included in Item 8 of this Annual Report on Form 10-K.

Inherent Limitations on Effectiveness of Controls

Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. The design of a control system must reflect the fact that the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within Intersil have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. 

Item 9B.Other Information.

None.

PART III

Item 10.Directors, Executive Officers and Corporate Governance.

Members of the Board of Directors

The following individuals served on our Board of Directors as of January 2, 2015:

Robert W. Conn;  James V. Diller;  Mercedes Johnson; Sohail Khan;  Gregory Lang;  Donald Macleod; Forrest Norrod; Jan Peeters;   Necip Sayiner; and James A. Urry.  The information required to be reported with respect to the directors listed in this paragraph pursuant to Item 401 of Regulation S-K will appear under the caption, “Election of Directors (Item 1 on Proxy Ballot)” in the definitive Proxy Statement relating to our 2014 Annual Meeting of Shareholders, to be filed by us with the SEC pursuant to Section 14(a) of the Exchange Act and is hereby specifically incorporated herein by reference thereto.

Executive Officers and Key Employees

The executive officers and key employees of Intersil as of January 2, 2015 were as follows:

Necip Sayiner; Richard Crowley; Gerald J. Edwards; Roger Wendelken; and Thomas C. Tokos. The information required to be reported with respect to the executive officers and key employees listed in this paragraph pursuant to Item 401 of Regulation S-K will appear under the caption “Executive Officers and Key Employees” in the definitive Proxy Statement relating to our 2015 Annual Meeting of Shareholders, to be filed by us with the SEC pursuant to Section 14(a) of the Exchange Act, and is hereby specifically incorporated herein by reference thereto.

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The information required under this item with respect to the compliance with Section 16(a) of the Exchange Act will appear under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the definitive Proxy Statement relating to our 2014 Annual Meeting of Shareholders, to be filed by us with the SEC pursuant to Section 14(a) of the Exchange Act, and is hereby specifically incorporated herein by reference thereto.

The information required under this item with respect to our Audit, Compensation and Nominating and Governance Committees will appear under the captions “Corporate Governance—Committees of the Board—Audit Committee,” “Corporate Governance—Committees of the Board—Compensation Committee,” and “Corporate Governance—Committees of the Board—Nominating and Governance Committee” in the definitive Proxy Statement relating to our 2015 Annual Meeting of Shareholders, to be filed by us with the SEC pursuant to Section 14(a) of the Exchange Act, and is hereby specifically incorporated herein by reference thereto.

We have adopted a Code of Ethics applicable to our Senior Financial Officers, including our CEO, CFO and other persons performing similar functions. A copy of the Code of Ethics is available on the Investor Relations section of our website at, www.intersil.com/investor.  Any amendment to, or waiver of, any provision of the Code of Ethics will be disclosed on our website within five business days following such amendment or waiver.

Item 11.Executive Compensation.

The information required under this item will appear under the captions “Executive Compensation” and “Director Compensation” in the definitive Proxy Statement relating to our 2015 Annual Meeting of Shareholders, to be filed by us with the SEC pursuant to Section 14(a) of the Exchange Act, and is hereby specifically incorporated herein by reference thereto.

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required under this item will appear under the captions “Equity Compensation Plan Information,” “Security Ownership of Certain Beneficial Owners and Directors and Officers” and “Potential Payments Upon Termination or Change-in-Control Benefits” in the definitive Proxy Statement relating to our 2015 Annual Meeting of Shareholders, to be filed by us with the SEC pursuant to Section 14(a) of the Exchange Act, and is hereby specifically incorporated herein by reference thereto.

Item 13.Certain Relationships and Related Transactions, and Director Independence.

The information required under this item will appear under the caption “Corporate Governance” in the definitive Proxy Statement relating to our 2015 Annual Meeting of Shareholders, to be filed by us with the SEC pursuant to Section 14(a) of the Exchange Act, and is hereby specifically incorporated herein by reference thereto.

Item 14.Principal Accounting Fees and Services.

The information required under this item will appear under the captions “Corporate Governance—Committees of the Board—Audit Committee,” “Ratification of Appointment of Independent Registered Public Accounting Firm” (Item 2 on Proxy Ballot), “Audit and Other Fees Paid to KPMG LLP” ” in the definitive Proxy Statement relating to our 2015 Annual Meeting of Shareholders, to be filed by us with the SEC pursuant to Section 14(a) of the Exchange Act, and is hereby specifically incorporated herein by reference thereto.

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PART IV

Item 15.Exhibits, Financial Statement Schedules.

(a)

The consolidated financial statements and related Notes thereto as set forth under Item 8 of this Annual Report on Form 10-K are incorporated herein by reference.

(b)

Financial Statement Schedules.

SCHEDULE II

 

 

 

 

 

 

 

 

 

 

 

 

Valuation and Qualifying Accounts

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Valuation and qualifying accounts deducted from the assets to which they apply

 

Balance as of Beginning of Period

 

Additions Charged to Costs and Expenses

 

Additions Charged (Credited) to Other Accounts

 

Deduction from Allowances

 

Balance as of End of Period

Allowance for uncollectible accounts

 

 

 

 

 

 

 

 

 

 

2014 

 

$              526

 

$              210

 

$             (733)

 

$                  -

 

$                  3

2013 

 

$                26

 

$           1,319

 

$             (819)

 

$                  -

 

$              526

2012 

 

$              168

 

$             (142)

 

$                  -

 

$                  -

 

$                26

 

 

 

 

 

 

 

 

 

 

 

Sales returns and allowances

 

 

 

 

 

 

 

 

 

 

2014 

 

$         13,754

 

$       101,321

 

$                  -

 

$      (101,788)

 

$         13,287

2013 

 

$         14,865

 

$         86,520

 

$             (599)

 

$        (87,032)

 

$         13,754

2012 

 

$         14,471

 

$         96,463

 

$              271

 

$        (96,340)

 

$         14,865

 

The additions charged to costs and expenses are classified as reduction of revenue for the allowance for uncollectible accounts and sales returns and allowances.

All other schedules for which provision is made in the applicable accounting regulation of the SEC are not required under the related instructions or are inapplicable and therefore have been omitted.

 

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(c)

Index to Exhibits.

INDEX TO EXHIBITS

 

 

 

Exhibit No.

Description

3.1

Amended and Restated Certificate of Incorporation of Intersil Corporation (incorporated by reference to Exhibit 3.01 to the Quarterly Report on Form 10-Q, filed August 9, 2005).

 

 

3.2

Amended and Restated Bylaws of Intersil Corporation. (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K/A, filed November 12, 2014)

 

 

4

Specimen Certificate of Intersil Corporation’s Class A Common Stock (incorporated by reference to Exhibit 4.1 to the Annual Report on Form 10-K, filed February 27, 2007).

 

 

10.1

Credit Agreement dated September 1, 2011, by and among Intersil, the Lenders (as defined therein), Bank of America, N.A. as administrative agent, swing line lender and letter of credit issuer (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed September 8, 2011).

 

 

10.2

First Amendment to Credit Agreement dated June 20 2012, by and among Intersil, the Lenders (as defined therein), and Bank of America, N.A. as administrative agent, swing line lender and letter of credit issuer (incorporated by reference to Exhibit 10 to the Quarterly Report on Form 10-Q, filed August 3, 2012).

 

 

10.3

Second Amendment to Credit Agreement dated September 20 2012, by and among Intersil, the Lenders (as defined therein), and Bank of America, N.A. as administrative agent, swing line lender, and letter of credit issuer (incorporated by reference to Exhibit 10 to the Quarterly Report on Form 10-Q, filed November 2, 2012).

 

 

 

 

67

 

 


 

10.4

Intersil Corporation Amended and Restated 2008 Equity Compensation Plan, effective May 6, 2014 (incorporated herein by reference to Exhibit A to the Definitive Proxy Statement on Form DEFR14A, filed March 28, 2014).

 

 

10.5

Intersil Corporation Employee Stock Purchase Plan (as amended May 6, 2014), (incorporated by reference to Exhibit B to the Definitive Proxy Statement on Form DEFR14A, filed March 28, 2014).

 

 

10.6

Intersil Corporation Executive Incentive Plan (incorporated by reference to Exhibit C to the Definitive Proxy Statement on Form DEFR14A, filed March 28, 2014).

 

 

10.7

Indemnity Agreement between Forrest Norrod and Intersil Corporation effective as of October 27, 2014 (incorporated by reference to the standard Indemnity Agreement on Exhibit 99.2 to the Current Report on Form 8-K filed on October 28, 2014).

 

 

10.8

Indemnity Agreement between Sohail Khan and Intersil Corporation effective as of October 27, 2014 (incorporated by reference to the standard Indemnity Agreement on Exhibit 99.2 to the Current Report on Form 8-K filed on October 28, 2014).

 

 

14

Intersil Code of Ethics (incorporated by reference to Exhibit 14.01 to the Annual Report on Form 10-K, filed March 9, 2004).

 

 

21

Subsidiaries of Intersil Corporation.*

 

 

23

Consent of KPMG LLP, Independent Registered Public Accounting Firm.*

 

 

31.1

Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Exchange Act, as adopted by Section 302 of the Sarbanes-Oxley Act of 2002.*

 

 

31.2

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Exchange Act, as adopted by Section 302 of the Sarbanes-Oxley Act of 2002.*

 

 

32

Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

 

 

101.INS

XBRL Instance document

 

 

101.SCH

XBRL Taxonomy Extension Schema

 

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase

 

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase

 

 

101.LAB

XBRL Taxonomy Extension Label Linkbase

 

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase

 

 

 

 

*Filed herewith.

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

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

 

 

 

INTERSIL CORPORATION

 

 

By:

/s/ Necip Sayiner

 

Necip Sayiner

President & Chief Executive Officer

February 12, 2015

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

 

 

 

 

 

 

 

 

Name

 

Title

 

Date

 

 

 

 

 

 

By:

/s/ Necip Sayiner

 

President, Chief Executive Officer and

 

February 12, 2015

 

Necip Sayiner

 

Director (principal executive officer)

 

 

 

 

 

 

 

 

By:

/s/ Richard Crowley

 

Chief Financial Officer (principal financial

 

February 12, 2015

 

Richard Crowley

 

and accounting officer)

 

 

 

 

 

 

 

 

By:

/s/ Donald Macleod

 

Chairman of the Board of Directors

 

February 12, 2015

 

Donald Macleod

 

 

 

 

 

 

 

 

 

 

By:

/s/ Robert W. Conn

 

Director

 

February 12, 2015

 

Robert W. Conn

 

 

 

 

 

 

 

 

 

 

By:

/s/ James V. Diller

 

Director

 

February 12, 2015

 

James V. Diller

 

 

 

 

 

 

 

 

 

 

By:

/s/ Mercedes Johnson

 

Director

 

February 12, 2015

 

Mercedes Johnson

 

 

 

 

 

 

 

 

 

 

By:

/s/ Sohail Khan

 

Director

 

February 12, 2015

 

Sohail Khan

 

 

 

 

 

 

 

 

 

 

By:

/s/ Gregory Lang

 

Director

 

February 12, 2015

 

Gregory Lang

 

 

 

 

 

 

 

 

 

 

By:

/s/ Forrest Norrod

 

Director

 

February 12, 2015

 

Forrest Norrod

 

 

 

 

 

 

 

 

 

 

By:

/s/ Jan Peeters

 

Director

 

February 12, 2015

 

Jan Peeters

 

 

 

 

 

 

 

 

 

 

By:

/s/ James A. Urry

 

Director

 

February 12, 2015

 

James A. Urry

 

 

 

 

 

69