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, personal 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 is 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 significant 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 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.
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 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 $11.6 million in mutual fund investments and corporate-owned life insurance under the plan. Changes in the fair value of the asset are recorded as a gain (loss) on deferred compensation investments and changes in the fair value of the liability are recorded as a component of compensation expense. In general, the compensation expense (benefit) is substantially offset by the gains and losses on the investment. During fiscal 2013, 2012 and 2011, we recorded gains (losses) on deferred compensation investments of $1.5 million, $0.9 million, and ($0.5) million, respectively and compensation expense (benefit) of
$1.7
million,
$1.1
million, and
($0.1)
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:
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—
The allowance for doubtful accounts 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. Collection problems are identified using an aging of receivables analysis based on invoice due dates and other information. 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 sales. 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. Aggregate accounts receivable allowances at January 3, 2014 and December 28, 2012 were $14.3 million and $14.9 million, respectively. 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 total 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 reserved
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.
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 a goodwill impairment analysis using the two-step method on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The recoverability of goodwill is measured at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair market value of the reporting unit
The first step of the goodwill impairment test (“Step One”) is to identify potential impairment. This involves comparing the fair value of each reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds the carrying amount, the goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the impairment test (“Step Two”) is performed to measure the amount of impairment loss, if any.
Step Two involves comparison of the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to that excess. The loss recognized cannot exceed the carrying amount of the goodwill. Once a goodwill impairment loss is recognized, the adjusted carrying amount becomes the new accounting basis.
Purchased Intangibles
—Purchased intangibles are definite-lived intangible assets which are amortized 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 resolution 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 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 3, 2014 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 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. Generally, 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 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):
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As of January 3, 2014
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As of December 28, 2012
|
Deferred revenue at published list price
|
|
$ 15,075
|
|
$ 12,272
|
Deferred cost of revenue
|
|
$ (3,139)
|
|
$ (2,700)
|
Deferred income
|
|
$ 11,936
|
|
$ 9,572
|
The following table summarizes the relationship between shipments, allowances and reported revenue (in thousands):
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Year ended
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January 3, 2014
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December 28, 2012
|
|
December 30, 2011
|
Gross revenue
|
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$ 662,227
|
|
$ 701,895
|
|
$ 829,762
|
Allowances and deferrals
|
|
$ (87,032)
|
|
$ (94,031)
|
|
$ (69,272)
|
Revenue
|
|
$ 575,195
|
|
$ 607,864
|
|
$ 760,490
|
In fiscal years 2012 and 2011, we entered into price protection agreements with additional international distributors to solidify our relationships and stabilize prices across geographic regions, which resulted in increased allowances and deferrals from 2011 levels due primarily to increased ship and debit and stock rotation returns.
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 receivable, deferred income, and net income (loss).
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 Expense
—Advertising costs are expensed in the period incurred. Advertising expense was
$3.4
million,
$6.3
million and
$6.7
million in 2013, 2012 and 2011, respectively.
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.
We also have the 2000 ESPP whereby eligible employees can purchase shares of Intersil common stock
through payroll deductions at a price not less than
85
% of the market value of the stock on specified dates, with no lookback provision.
Stock-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 binomial lattice model to measure the fair value of Options and a Monte-Carlo simulation to estimate the fair value of Options and Awards that include market conditions. Both models utilize various inputs with respect to expected lives, risk-free interest rates, historical volatility and dividend yield. The assumptions we use in the valuation model are based on subjective future expectations combined with management judgment.
Volatility is one of the most significant determinants of fair value. We estimate our volatility using the actual historic volatility of our stock price. 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.
A
s vesting tiers within an Option are more frequent
after the first year
until fully vested, forfeitures
on options
are recorded as they actually occur. We estimate the annualized dividend yield by dividing the current annualized dividend by the closing stock price on the date of grant. If any of the assumptions used in the model changes, stock-based compensation for future awards may differ materially compared to the awards granted previously.
Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. Stock-based compensation expense is recorded net of estimated forfeitures such that expense is recorded only for those stock-based awards that are expected to vest. Previously recognized expense is reversed for the portion of awards forfeited prior to vesting as and when forfeitures occurred.
Most Options granted 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, gener
ally
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
$5.4
million,
$6.2
million, and
$6.8
million during fiscal years 2013, 2012, and 2011 respectively.
We also have voluntary defined contribution plans in various non-U.S. locations. We also maintain a limited number of defined benefit plans for certain non-U.S. locations. Total costs under these plans were
$3.6
million,
$1.3
million, and
$1.3
million during fiscal years 2013, 2012, and 2011 respectively. Accrued liabilities relating to these unfunded plans were
$7.5
million and
$5.1
million as of January 3, 2014 and December 28, 2012, 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
$2.7
million,
$3.2
million and
$3.0
million as of January 3, 2014, December 28, 2012 and December 30, 2011, respectively. For subsidiaries where the functional currency is the U.S. dollar, gains and losses resulting from remeasuring 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 December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") No. 2011-11 “Disclosures about Offsetting Assets and Liabilities.” The standard 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.
In February 2013, the FASB issued ASU No. 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income." Under ASU 2013-02, an entity is required to provide information about the amounts reclassified out of Accumulated OCI by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of Accumulated OCI by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in the financial statements. ASU 2013-02 was effective for our first quarter of fiscal year 2013 and did not have a material impact on our financial statements.
In July 2012, the FASB ASU No. 2012-02, Intangibles—Goodwill and Other (Topic 350)—Testing Indefinite- Lived Intangible Assets for Impairment. ASU 2012-02 permits an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30. If an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then no further action is required. If an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test. ASU 2012-02 was effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The adoption of this ASU did not have a material impact on our financial statements. (See Note 8)
Recent Accounting Guidance Not Yet Adopted -
In July 2013, the FASB issued an amendment to the accounting guidance related to the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. The guidance requires an unrecognized tax benefit to be presented as a decrease in a deferred tax asset where a net operating loss, a similar tax loss, or a tax credit carryforward exists and certain criteria are met. This guidance is effective for our first quarter of fiscal year 2014. The adoption of this guidance will not have a significant impact on our results of operations and financial position.
NOTE 3—INVESTMENTS
Our investments are classified as follows (in thousands):
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As of December 28, 2012
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Amortized cost
|
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Gross unrealized gains
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Gross unrealized losses
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Fair value
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Maturity range (in years)
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Short-term Investments
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Bank time deposits
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|
$ 4,751
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$ -
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$ -
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$ 4,751
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<1
|
We
classify bank time deposits as available for sale (“
AFS
”)
and record them at fair value. We did not have any short-term or long-term investments outstanding on January 3, 2014.
NOTE 4—FAIR VALUE MEASUREMENTS
We determine fair value on the following assets using these input levels (in thousands):
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Fair value as of January 3, 2014 using:
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Total
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Quoted prices in active markets for identical assets (Level 1)
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Significant other observable inputs (Level 2)
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Assets
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Other non-current assets:
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Deferred compensation investments
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$ 11,579
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$ 491
|
|
$ 11,088
|
Total assets measured at fair value
|
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$ 11,579
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$ 491
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$ 11,088
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Fair value as of December 28, 2012 using:
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Total
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Quoted prices in active markets for identical assets (Level 1)
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Significant other observable inputs (Level 2)
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Assets
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Short-term investments:
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Bank time deposits
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$ 4,751
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$ -
|
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$ 4,751
|
Other non-current assets:
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Deferred compensation investments
|
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11,096
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|
368
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|
10,728
|
Total assets measured at fair value
|
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$ 15,847
|
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$ 368
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$ 15,479
|
There were no transfers into or out of Level 1 and Level 2 financial assets and liabilities during fiscal years 2013 or 2012.
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 5—FINANCIAL INSTRUMENTS AND DERIVATIVES
We did not have any derivatives designated as hedging instruments outstanding on January 3, 2014 or December 28, 2012.
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Year ended
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Income statement location
|
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January 3, 2014
|
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December 28, 2012
|
|
December 30, 2011
|
Interest rate swap agreements
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|
Loss recognized in accumulated OCI (effective portion), net of tax
|
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|
$ -
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|
$ -
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|
$ (1,187)
|
Loss reclassified from accumulated OCI to earnings (effective portion)
|
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Interest expense and fees
|
|
$ -
|
|
$ (6,547)
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|
$ (99)
|
Loss recognized in earnings (ineffective portion)
|
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Interest expense and fees
|
|
$ -
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|
$ (95)
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|
$ (214)
|
In fiscal 2011, we terminated our prior interest rate hedge transaction (the “Old Swap”), and settled the interest rate swap agreement for
$3.2
million. As of December 30, 2011, we had approximately
$1.8
million, net of tax, remaining in accumulated OCI, to be reclassified into earnings as a component of interest expense commensurate with the forecasted interest payments.
During the third quarter of fiscal 2011, we entered into additional interest rate swap transactions (the “New Swaps”) 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 New 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 Old Swap and New Swaps, was reclassified to interest expense and fees. We further settled the New Swaps for
$3.7
million
during fiscal 2012
.
The effects of derivatives not designated as hedging instruments on the consolidated statements of operations are as follows (in thousands):
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|
|
|
|
|
|
|
|
|
Year ended
|
|
|
Income statement location
|
|
January 3, 2014
|
|
December 28, 2012
|
|
December 30, 2011
|
Loss on foreign exchange options
|
|
Cost of revenue
|
|
$ -
|
|
$ (679)
|
|
$ (778)
|
The tables below describe total open foreign exchange contracts (all are options to sell foreign currencies) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
|
|
|
January 3, 2014
|
|
December 28, 2012
|
|
December 30, 2011
|
Unrealized (loss) gain on foreign exchange contracts
|
|
$ -
|
|
$ (653)
|
|
$ 568
|
Purchases and sales of foreign exchange contracts
|
|
-
|
|
31,428
|
|
41,038
|
Notional amount of open contracts as of year end
|
|
-
|
|
12,429
|
|
20,239
|
|
|
|
|
|
|
|
Notional Amount of Open Foreign Currency Contracts
|
|
Euros
|
|
U.S. Dollars
|
|
Range of Maturities
|
|
(€ and $ in thousands)
|
January 3, 2014
|
|
-
|
|
-
|
|
n/a
|
December 28, 2012
|
|
€ 10,000
|
|
$ 12,429
|
|
1 – 5 months
|
NOTE 6—INVENTORIES
Inventories are summarized below (in thousands):
|
|
|
|
|
|
|
As of
|
|
As of
|
|
|
January 3, 2014
|
|
December 28, 2012
|
Finished products
|
|
$ 20,783
|
|
$ 25,230
|
Work in process
|
|
38,759
|
|
46,739
|
Raw materials
|
|
2,866
|
|
2,899
|
Total inventories
|
|
$ 62,408
|
|
$ 74,868
|
As of January 3, 2014, Intersil was committed to purchase
$17.4
million of raw material inventory from suppliers.
NOTE 7—PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized below (in thousands):
|
|
|
|
|
As of
|
|
As of
|
|
January 3, 2014
|
|
December 28, 2012
|
Land
|
$ 1,708
|
|
$ 1,708
|
Buildings and leasehold improvements
|
59,743
|
|
60,099
|
Machinery and equipment
|
244,940
|
|
243,075
|
Construction in progress
|
21,956
|
|
8,571
|
Total property, plant and equipment
|
328,347
|
|
313,453
|
Accumulated depreciation and leasehold amortization
|
(246,480)
|
|
(228,079)
|
Total property, plant and equipment, net
|
$ 81,867
|
|
$ 85,374
|
Depreciation expense was
$19.0
million,
$19.5
million and
$22.1
million for fiscal years 2013, 2012 and 2011, respectively. Non-cash accruals for purchases of property, plant and equipment were minimal for fiscal 2013,
$1.5
million for fiscal 2012, and
$0.4
million for fiscal 2011. As of January 3, 2014, we had open capital asset purchase commitments of
$1.2
million.
NOTE 8—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 December 28, 2012 and January 3, 2014
|
|
$ 1,720,100
|
Impairment charge (recorded in 2008)
|
|
(1,154,676)
|
Goodwill balance as of December 28, 2012 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.
During the third quarter of fiscal year 2011, we reorganized our reporting units, increasing from two reporting units to three reporting units – analog & mixed-signal, power management, and consumer. 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 year. In fiscal years 2013, 2012 and 2011, 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 5, 2013, the first day of our fourth quarter and the date at which we performed our test.
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):
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
As of December 28, 2012
|
|
|
Definite-lived: developed technologies
|
|
Definite-lived: other
|
|
Total purchased intangibles
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$ 113,533
|
|
$ 53,020
|
|
$ 166,553
|
Accumulated amortization
|
|
58,303
|
|
25,252
|
|
83,555
|
Purchased intangibles, net
|
|
$ 55,230
|
|
$ 27,768
|
|
$ 82,998
|
We recorded amortization expense as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
By statement of operations line item
|
|
January 3, 2014
|
|
December 28, 2012
|
|
December 30, 2011
|
Amortization of purchased intangibles
|
|
$ 24,579
|
|
$ 29,185
|
|
$ 26,830
|
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 9). The impairment charge is included as a component of restructuring and related costs in our consolidated statements of operations.
Expected amortization expense by year to the end of the current amortization schedule is as follows (in thousands):
|
|
|
|
To be recognized in:
|
|
|
|
Fiscal year 2014
|
|
|
$ 22,242
|
Fiscal year 2015
|
|
|
16,717
|
Fiscal year 2016
|
|
|
9,010
|
Fiscal year 2017
|
|
|
6,757
|
Fiscal year 2018
|
|
|
1,915
|
Thereafter
|
|
|
-
|
Total expected amortization expense
|
|
|
$ 56,641
|
NOTE 9—RESTRUCTURING AND RELATED COSTS
As part of an effort to streamline operations with changing market conditions and to create a more efficient organization, we have undertaken restructuring actions to reduce our workforce and consolidate facilities. Our restructuring costs consist 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 approximately
1%
of our worldwide workforce.
The October 2013 plan is expected to be substantially complete by the end of the first quarter of 2014.
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 approximately
12%
, which we anticipate will be gradually offset by the addition of new hires in design and development over subsequent quarters. The July 2013 plan is expected to be substantially complete by the end of the first quarter of 2014.
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 approximately
18%
of our worldwide workforce. The February 2013 restructuring plan was substantially complete at the end of the second quarter of 2013.
No
further expense related to these plans is anticipated.
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.
No
further expense related to these plans is anticipated.
The amounts below relating to the restructuring are included in other accrued expenses (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring activity from the Oct 2013 plan
|
|
Restructuring activity from the July 2013 plan
|
|
Restructuring activity from the February 2013 plan
|
|
Restructuring activity from plans initiated in 2012
|
|
Combined plans
|
Balance as of December 28, 2012
|
|
$ -
|
|
$ -
|
|
$ -
|
|
$ 1,053
|
|
$ 1,053
|
|
|
|
|
|
|
|
|
|
|
|
Costs incurred
|
|
|
|
|
|
|
|
|
|
|
Severance costs
|
|
639
|
|
6,570
|
|
11,581
|
|
(64)
|
|
18,726
|
Lease exit costs
|
|
-
|
|
1,118
|
|
908
|
|
13
|
|
2,039
|
Other costs
|
|
1
|
|
1,371
|
|
6,553
|
|
4
|
|
7,929
|
Cash payments
|
|
|
|
|
|
|
|
|
|
|
Severance payments
|
|
(105)
|
|
(3,780)
|
|
(10,181)
|
|
(364)
|
|
(14,430)
|
Lease exit payments
|
|
-
|
|
(245)
|
|
(869)
|
|
(275)
|
|
(1,389)
|
Other payments
|
|
(1)
|
|
(107)
|
|
(410)
|
|
(163)
|
|
(681)
|
Non-cash items in restructuring
|
|
-
|
|
(1,039)
|
|
(6,145)
|
|
-
|
|
(7,184)
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 3, 2014
|
|
$ 534
|
|
$ 3,888
|
|
$ 1,437
|
|
$ 204
|
|
$ 6,063
|
Non-cash items include certain prepaid, intangible, fixed, and other assets that were written off as a result of the restructuring initiatives.
NOTE 10—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 2010.
Income (loss) before income taxes is allocated between domestic and foreign jurisdictions as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
January 3, 2014
|
|
December 28, 2012
|
|
December 30, 2011
|
|
|
|
|
|
|
|
Domestic
|
|
$ 22,140
|
|
$ 12,394
|
|
$ 19,284
|
Foreign
|
|
(8,263)
|
|
(20,060)
|
|
34,145
|
Income (loss) before income taxes
|
|
$ 13,877
|
|
$ (7,666)
|
|
$ 53,429
|
Income tax expense (benefit)
—The provision for income taxes is summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
January 3, 2014
|
|
December 28, 2012
|
|
December 30, 2011
|
Current taxes:
|
|
|
|
|
|
|
Federal
|
|
$ (2,090)
|
|
$ 10,300
|
|
$ (11,189)
|
State
|
|
34
|
|
3,638
|
|
(133)
|
Foreign
|
|
2,879
|
|
2,042
|
|
5,537
|
|
|
823
|
|
15,980
|
|
(5,785)
|
Deferred taxes:
|
|
|
|
|
|
|
Federal
|
|
11,911
|
|
20,329
|
|
(796)
|
State
|
|
545
|
|
(4,871)
|
|
(1,742)
|
Foreign
|
|
(2,257)
|
|
(1,455)
|
|
(5,412)
|
|
|
10,199
|
|
14,003
|
|
(7,950)
|
Income tax expense (benefit)
|
|
$ 11,022
|
|
$ 29,983
|
|
$ (13,735)
|
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 $1.3 million, $1.6 million and $2.5 million during fiscal years 2013, 2012 and 2011, 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 3, 2014
|
|
December 28, 2012
|
|
December 30, 2011
|
|
|
|
|
|
|
|
Tax effects from earnings attributable to Malaysia
|
|
$ (2,483)
|
|
$ (5,132)
|
|
$ 8,943
|
|
|
|
|
|
|
|
Effect on earnings (loss) per share:
|
|
|
|
|
|
|
Basic
|
|
$ (0.02)
|
|
$ (0.04)
|
|
$ 0.07
|
Diluted
|
|
$ (0.02)
|
|
$ (0.04)
|
|
$ 0.07
|
Deferred income taxes
—The components of deferred income tax assets and liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 3, 2014
|
|
As of December 28, 2012
|
|
Current
|
|
Non-Current
|
|
Current
|
|
Non-Current
|
Inventory
|
$ 14,561
|
|
$ -
|
|
$ 14,615
|
|
$ -
|
Property, plant and equipment
|
-
|
|
3,445
|
|
-
|
|
1,200
|
Accrued expenses
|
5,343
|
|
-
|
|
4,557
|
|
-
|
Equity-based compensation
|
-
|
|
8,095
|
|
-
|
|
11,300
|
Net operating loss carryforward
|
1,285
|
|
23,327
|
|
2,186
|
|
24,120
|
Capitalized research and development
|
-
|
|
2,142
|
|
-
|
|
4,001
|
Deferred compensation
|
-
|
|
3,477
|
|
-
|
|
4,213
|
Deferred revenue
|
4,285
|
|
-
|
|
3,322
|
|
-
|
Tax credits
|
7,483
|
|
52,262
|
|
4,135
|
|
67,086
|
Capital loss carryforward
|
-
|
|
7,263
|
|
-
|
|
7,383
|
All other, net
|
480
|
|
4,388
|
|
150
|
|
2,144
|
Deferred tax assets
|
33,437
|
|
104,399
|
|
28,965
|
|
121,447
|
Deferred tax liabilities: intangibles
|
-
|
|
-
|
|
-
|
|
(724)
|
Valuation allowance
|
(11,109)
|
|
(31,391)
|
|
(8,959)
|
|
(35,197)
|
Net deferred tax assets
|
$ 22,328
|
|
$ 73,008
|
|
$ 20,006
|
|
$ 85,526
|
The table below summarizes the activity in valuation allowances (in thousands):
|
|
|
|
|
|
|
As of January 3, 2014
|
|
As of December 28, 2012
|
Beginning balance
|
|
$ 44,156
|
|
$ 19,199
|
(Decreases) increases related to state attributes
|
|
(1,537)
|
|
26,247
|
Decreases related to foreign net operating losses
|
|
-
|
|
(1,290)
|
Decreases related to capital losses
|
|
(119)
|
|
-
|
Ending balance
|
|
$ 42,500
|
|
$ 44,156
|
During the year ended January 3, 2014, we reduced our deferred tax assets related to the state R&D tax credits by
$1.5
million due to settlement with tax authorities. We also reduced our deferred tax assets by $0.1 million related to capital losses for expirations. The valuation allowances were also adjusted accordingly based on the deferred tax asset adjustments.
We completed an analysis of projected future taxable income and determined that all remaining deferred tax assets, including net operating loss carryforwards (“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 3, 2014.
We have gross NOLs of $42.4 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 $18.8 million that will expire in tax years 2031 through 2033.
Income tax provision (benefit) reconciliation
—A reconciliation of the statutory United States income tax to our effective income tax is as follows ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 3, 2014
|
|
|
December 28, 2012
|
|
|
December 30, 2011
|
|
Statutory U.S. income tax rate
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
Income tax provision reconciliation:
|
|
|
|
|
|
|
|
|
|
Tax at federal statutory income tax rate
|
|
$ 4,857
|
|
|
$ (2,683)
|
|
|
$ 18,700
|
|
State taxes
|
|
1,198
|
|
|
997
|
|
|
1,021
|
|
Cost (benefit) of earnings subject to tax rates other than U.S.
|
|
3,505
|
|
|
7,293
|
|
|
(16,492)
|
|
International equity-based compensation
|
|
2,422
|
|
|
2,951
|
|
|
3,800
|
|
Research credits
|
|
(10,313)
|
|
|
(3,910)
|
|
|
(27,307)
|
|
Change in valuation allowance
|
|
-
|
|
|
-
|
|
|
17,232
|
|
Change in unrecognized tax benefits
|
|
116
|
|
|
20,675
|
|
|
(10,944)
|
|
Subpart F—interest & stock gain
|
|
326
|
|
|
621
|
|
|
(207)
|
|
Manufacturing deduction
|
|
(370)
|
|
|
(100)
|
|
|
(1,063)
|
|
Amortization of deferred tax charge
|
|
(2,964)
|
|
|
(2,967)
|
|
|
(3,027)
|
|
Tax shortfalls on share based compensation
|
|
3,277
|
|
|
-
|
|
|
-
|
|
Export compliance settlement
|
|
2,100
|
|
|
-
|
|
|
-
|
|
Interest
|
|
779
|
|
|
-
|
|
|
-
|
|
Royalty income
|
|
5,557
|
|
|
6,504
|
|
|
6,949
|
|
Other items
|
|
532
|
|
|
602
|
|
|
(2,397)
|
|
Total income tax provision (benefit)
|
|
$ 11,022
|
|
|
$ 29,983
|
|
|
$ (13,735)
|
|
Uncertain tax positions and UTBs
During fiscal 2013, we recorded an increase of $
1.8
million of potential interest on UTBs in the consolidated statement of operations. D
uring 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. During fiscal 2011, we recognized $1.3 million of potential interest and a reduction of $3.3 million of potential penalties on UTBs in the consolidated statement of operations.
The table below summarizes activity in UTBs (in thousands):
|
|
|
|
|
|
|
As of January 3, 2014
|
|
As of December 28, 2012
|
Beginning balance (includes interest and penalties of $5,327 thousand as of December 28, 2012)
|
|
$ 112,867
|
|
$ 154,395
|
Increases related to current year tax positions
|
|
1,157
|
|
-
|
Increases related to prior year tax positions
|
|
10,874
|
|
22,071
|
Settlements with tax authorities
|
|
(25,555)
|
|
(63,599)
|
Ending balance (includes interest and penalties of $7,102 thousand as of January 3, 2014)
|
|
$ 99,343
|
|
$ 112,867
|
The increases related to prior year tax positions in fiscal 2013 were primarily due to an audit in Switzerland for tax years 2009-2010 and accrued interest on the UTBs. The increases related to prior year tax positions do not have a material impact on the effective tax rate. The remaining balance in UTBs is primarily related to transfer pricing and a provision related to an IRS examination for tax years 2010 – 2011. The increase in the UTBs for fiscal 2012 was primarily due to the election of Rev. Proc. 99-32 for tax years 2005 – 2009, which resulted in a $12.5 million charge. The additional $9.6 million relates to the re-measurement of transfer pricing adjustments and related interest for the outbound pricing of tangible goods and our cost sharing arrangement for the tax years 2005 – 2011 based on interactions with the IRS.
During fiscal 2013, we reached final settlement with the Internal Revenue Service (“IRS”) in connection with the 2008 – 2009 examinatio
n 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. As a result of the settlement, we reduced our UTB balance by
$24.6
million. This reduction included a
$7.5
million cash payment to the IRS, consisting of
$6.7
million of additional tax and
$0.8
million of interest; a
$15.9
million decrease in deferred tax assets related federal R&D tax credits, federal alternative minimum tax (“AMT”) tax credits, and federal net operating loss (“NOL”) tax attributes; and
$1.2
million cash payments for amended returns filed with state authorities related to the IRS examination settlement.
We also reduced our UTB balance by
$1.0
million upon settlement of an audit with the State of California related to tax years 2005-2008 for a benefit resulting in a reduction of income tax expense for $1.0 million.
During fiscal 2012, we reached final settlement with the IRS in connection with the 2005 – 2007 examination periods and decreased our UTBs in the amount of $63.6 million. The examination primarily focused on the outbound pricing of tangible goods and valuation of the intangible property sold to our CFC. The settlement resulted in a
$57.6
million reduction in UTBs, which was a component of income taxes payable, comprised of a cash payment of
$46.6
million to the IRS and an
$11.0
million decrease in deferred tax assets related federal R&D tax credits. We further reduced the UTB balance with a
$6.0
million payment to the state authorities related to the IRS examination settlement. We also recorded an increase to income tax expense and income taxes payable of
$11.7
million related to interest due to the Rev. Proc. 99-32 election, which allowed for the repatriation of
$162.3
million of cash during 2012.
We are currently under an IRS tax audit for tax years 2010 and 2011. While the audit covers a number of different issues, the focus is largely due to the intercompany pricing of goods and services between different tax jurisdictions. As the final resolution of the examination process remains uncertain for those years, we continue to provide for the uncertain tax positions based on our best estimate of the ultimate outcome.
Within the next 12 months, we estimate that our UTB balance will be reduced by
$0.6
million related to the state tax impact of the settlement with the IRS for tax years 2005 – 2007,
$1.2
million related to the state tax impact of the settlement with the IRS for tax years 2008 – 2009,
$1.8
million due to the expiration of the statute of limitation on certain items, and
$5.7
million for the Switzerland foreign currency transactions for the tax years 2009 – 2010.
Other Income Tax Information
Income taxes paid were $
16.6
million, $
49.4
million and $
11.1
million during fiscal years 2013, 2012 and 2011, respectively.
Interest and penalties paid were $
0.9
million during fiscal 2013,
$13.5
million during fiscal 2012 and a minimal amount in fiscal 2011.
We have not provided U.S. income taxes on $
352.4
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 p
racticable 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. During fiscal 2013, we recognized $3.3 million of income tax expense resulting from tax deficiencies related to share-based compensation in our consolidated statements of operations. We did not recognize any tax expense resulting from tax deficiencies during fiscal 2012 or 2011.
NOTE 11—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 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 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.
During the year ended December 30, 2011, we settled our previous term-loan facility for $278.2 million and recorded a loss on extinguishment of debt for the write-off of unamortized loan fees of $8.4 million.
We did not have any outstanding borrowings against the Facility as of January 3, 2014 or December 28, 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 3, 2014
|
|
|
December 28, 2012
|
|
|
December 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Cash paid for interest
|
|
$ -
|
|
|
$ 3,907
|
|
|
$ 12,966
|
|
Weighted-average interest rate (pre-tax)
|
|
-
|
%
|
|
2.48
|
%
|
|
4.47
|
%
|
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 3, 2014, and $2.2 million as of December 28, 2012. The standby letters of credit are secured by pledged deposits.
NOTE 12
—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 ag
reement settling a trade secret misappropriation and patent infringement dispute with another semiconducto
r company
.
NOTE 13—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 3, 2014 and December 28, 2012, 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; shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
January 3, 2014
|
|
December 28, 2012
|
|
December 30, 2011
|
Beginning balance
|
|
126,250
|
|
126,483
|
|
124,552
|
Shares issued under stock plans, net of shares withheld for taxes
|
|
1,465
|
|
1,667
|
|
1,931
|
Repurchase and retirement of common stock
|
|
-
|
|
(1,900)
|
|
-
|
Ending balance
|
|
127,715
|
|
126,250
|
|
126,483
|
Dividends paid to shareholders
|
|
$ 61,025
|
|
$ 60,955
|
|
$ 60,348
|
Dividends paid per share
|
|
$ 0.48
|
|
$ 0.48
|
|
$ 0.48
|
Dividends
—we have paid a quarterly dividend since September 2003. In January 2014, the Board of Directors declared a dividend of $0.12 per share to be paid in the first quarter of 2014, 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.
Share Repurchases—
On August 6, 2012, our Board of Directors authorized the repurchase of up to $
50.0
million of Intersil’s common stock. The stock repurchase program was for a period of
12
months and expired in August 2013. During fiscal year 2012, we repurchased and retired 1.9 million shares under the program at an average price per share of $
8.03
.
We did not repurchase any shares during fiscal year 2013.
NOTE 14—
RISKS 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 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 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
January 3, 2014
|
|
December 28, 2012
|
|
December 30, 2011
|
Revenue by country
|
|
|
|
|
|
|
China (includes Hong Kong)
|
|
52.9%
|
|
55.4%
|
|
54.9%
|
United States
|
|
15.7%
|
|
14.0%
|
|
13.5%
|
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 2013.
One distributor, Avnet, Inc (“Avnet”) represented
17.0%
,
14.9%
, and
11.4%
of revenue during fiscal years 2013, 2012 and 2011 respectively and
24.6
%
and
19.2%
of trade receivables as of January 3, 2014 and December 28, 2012. Another distributor, WPG Holdings Ltd. (“WPG”) represented
12.2%
,
12.8%
and
11.4%
of revenue during fiscal years 2013, 2012 and 2011 respectively and
13.8%
and
18.3%
of accounts receivable as of January 3, 2014 and December 28, 2012. The loss of any one or more of these customers could result in a materially negative impact on our business.
We rely on external vendors for
88.4%
of our wafer supply as measured in units. 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
January 3, 2014
|
|
December 28, 2012
|
|
December 30, 2011
|
United States operations
|
|
|
|
|
|
|
Revenue
|
|
$ 90,348
|
|
$ 85,356
|
|
$ 102,895
|
Tangible long-lived assets
|
|
$ 59,469
|
|
$ 54,048
|
|
$ 52,478
|
International operations
|
|
|
|
|
|
|
Revenue
|
|
$ 484,847
|
|
$ 522,508
|
|
$ 657,595
|
Tangible long-lived assets
|
|
$ 22,398
|
|
$ 31,326
|
|
$ 38,560
|
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.
NOTE 15—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 3, 2014
|
|
December 28, 2012
|
|
December 30, 2011
|
Numerator
:
|
|
|
|
|
|
|
Net income (loss) to common shareholders
|
|
$ 2,855
|
|
$ (37,649)
|
|
$ 67,164
|
Denominator:
|
|
|
|
|
|
|
Denominator for basic earnings (loss) per share—weighted average common shares
|
|
127,151
|
|
127,032
|
|
125,715
|
Effect of stock options and awards
|
|
847
|
|
-
|
|
323
|
Denominator for diluted earnings (loss) per share—adjusted weighted average common shares
|
|
127,998
|
|
127,032
|
|
126,038
|
Earnings (loss) per share:
|
|
|
|
|
|
|
Basic
|
|
$ 0.02
|
|
$ (0.30)
|
|
$ 0.53
|
Diluted
|
|
$ 0.02
|
|
$ (0.30)
|
|
$ 0.53
|
Anti-dilutive shares not included in the above calculations:
|
|
|
|
|
|
|
Awards
|
|
1,181
|
|
3,367
|
|
598
|
Options
|
|
6,774
|
|
11,946
|
|
13,948
|
NOTE 16—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 3, 2014
|
|
Shares Available for Issuance at January 3, 2014
|
1999 Plan
|
|
36,250
|
|
770
|
|
-
|
2008 Plan
|
|
34,352
|
|
9,642
|
|
10,061
|
2009 Option Exchange Plan
|
|
2,914
|
|
1,168
|
|
-
|
Acquired Plans
|
|
-
|
|
87
|
|
-
|
Inducement Plan
|
|
-
|
|
433
|
|
-
|
ESPP
|
|
6,533
|
|
-
|
|
985
|
|
|
80,049
|
|
12,100
|
|
11,046
|
Grant Date Fair Values and Underlying Assumptions; Contractual Terms
For Options granted in fiscal years 2013 and 2012, we estimated the fair value of each Option as of the date of grant with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
January 3, 2014
|
|
December 28, 2012
|
Range of expected volatilities
|
|
38.2 – 38.2%
|
|
36.9 – 41.5%
|
Weighted-average volatility
|
|
38.2%
|
|
39.3%
|
Range of dividend yields
|
|
5.7 – 5.7%
|
|
4.1 – 6.8%
|
Weighted-average dividend yield
|
|
5.7%
|
|
4.7%
|
Range of risk-free interest rates
|
|
0.6 – 0.6%
|
|
0.5 – 1.0%
|
Weighted-average risk-free interest rate
|
|
0.6%
|
|
0.8%
|
Range of expected lives, in years
|
|
2.6 – 2.6
|
|
2.6 – 5.1
|
Weighted-average expected life, in years
|
|
2.6
|
|
4.6
|
|
|
|
|
|
The following table represents the weighted-average fair value compensation cost per share of
Options and A
wards granted: