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INTERSIL CORP/DE - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion in conjunction with our unaudited condensed consolidated financial statements, including the notes thereto. Except for historical information, the discussions in this section contain forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed below. Forward Looking Statements This Quarterly Report on Form 10-Q contains statements relating to expected future results and business trends of Intersil Corporation 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. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," "may," "will," and variations of these words or similar expressions are intended to identify "forward-looking statements." 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." Such statements are not guarantees of future performance and are subject to certain risks, uncertainties, and assumptions that are difficult to predict. Therefore, undue reliance should not be placed on such statements because our actual results may differ materially and adversely from those expressed in any "forward-looking statement" as a result of various factors. These factors include, but are not limited to: • industry and global economic and market conditions, such as the cyclical nature of the semiconductor industry and the markets addressed by our and our customers' products; • global economic weakness, including insufficient credit available for our customers to purchase our products; • successful development of new products; • the timing of new product introductions and new product performance and quality; • manufacturing difficulties, such as the availability and extent of utilization of manufacturing capacity and raw materials; • the failure of our suppliers or outsource providers to perform their obligations in a manner consistent with our expectations; • pricing pressures and other competitive factors, such as competitors' new products; • changes in product mix; • product obsolescence; • legal challenges to our products and technology, such as intellectual property infringement and misappropriation claims; • customer service; • the need for additional capital; • legislative, tax, accounting, or regulatory changes or changes in their interpretation; • the ability to develop and implement new technologies and to obtain protection of the related intellectual property; • the successful integration of acquisitions; • demand for, and market acceptance of, new and existing products; • the extent and timing that customers order and use our productsand services in their production or business; • competitors with significantly greater financial, technical, manufacturing and marketing resources; • fluctuations in manufacturing yields; • procurement shortage; • transportation, communication, demand, information technology or supply disruptions based on factors outside of our control such as natural disasters, wars and terrorist activities; • changes in import export regulations; and • exchange rate fluctuations. These "forward-looking statements" are made only as of the date hereof, and we undertake no obligation to update or revise the "forward-looking statements," whether as a result of new information, future events or otherwise. Overview We design, develop, manufacture and market high-performance analog and mixed-signal integrated circuits (ICs). We believe our product portfolio addresses some of the fastest growing applications within the industrial, computing, communications and high-end consumer markets. 19-------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies You should refer to the disclosures regarding critical accounting policies in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010. Results of Operations Statement of operations data and percentage of revenue for the periods (% of revenue): Quarter ended Two quarter ended July 1, July 2, July 1, July 2, 2011 2010 2011 2010 Revenue 100.0 % 100.0 % 100.0 % 100.0 % Cost of revenue 41.8 % 41.7 % 41.9 % 42.5 % Gross profit 58.2 % 58.3 % 58.1 % 57.5 % Operating costs and expenses: Research and development 22.9 % 21.5 % 23.9 % 21.7 % Selling, general and administrative 17.3 % 16.2 % 17.5 % 16.4 % Amortization of purchased intangibles 3.2 % 3.7 % 3.3 % 2.7 % Restructuring - - 0.6 % - Acquisition-related costs - 3.0 % 0.1 % 1.8 % Operating income 14.8 % 14.0 % 12.7 % 14.8 % Interest income 0.3 % 0.4 % 0.4 % 0.4 % Interest expense and fees (2.0 )% (1.5 )% (2.1 )% (0.8 )% (Loss) gain on deferred compensation investments, net - (0.1 )% - - Other-than-temporary impairment losses - - - (0.3 )% Income before income taxes 13.1 % 12.8 % 11.0 % 14.1 % Income tax expense 2.7 % 39.8 % 2.2 % 21.9 % Net income (loss) 10.4 % (27.0 )% 8.8 % (7.8 )% Note: Totals and percentages may not add or calculate precisely due to rounding. We have modified certain amounts in the quarter(s) ended July 2, 2010 to conform to the presentation in the quarter(s) ended July 1, 2011. Revenue and Gross Profit Revenue for the quarter ended July 1, 2011 decreased $10.8 million or 4.9% to $209.1 million from $219.9 million during the quarter ended July 2, 2010. The decrease in sales was primarily in the industrial and communication end markets, partially offset by a slight increase in the consumer end markets. Sales into the communication and industrial end markets decreased by 11% and 9%, respectively, from the quarter ended July 2, 2010. Sales into the consumer end market increased 1% and sales into the computing end market remained relatively flat from same quarter last year. Revenues by end market were as follows ($ in millions): Quarter ended July 1, 2011 July 2, 2010 Revenue % of Revenue Revenue % of Revenue Industrial $ 63.5 30.4 % $ 69.8 31.7 % Computing 55.9 26.7 % 55.8 25.4 % Communication 43.2 20.6 % 48.3 22.0 % Consumer 46.5 22.3 % 46.0 20.9 % Total $ 209.1 100.0 % $ 219.9 100.0 % 20 -------------------------------------------------------------------------------- Table of Contents In aggregate, a 0.7% decrease in unit shipments decreased net revenue from second quarter of 2010 levels by $1.5 million and average selling prices (ASPs) decreased 4.3%, decreasing revenues by $9.3 million. Declining sales prices at the product level have occurred within the semiconductor industry for much of its existence. While individual products generally experience ASP declines over time, we endeavor to continually introduce new products which typically enter the market at prices higher than existing products. Fluctuations in ASPs are expected to continue into the future. Revenue for the two quarters ended July 1, 2011 decreased $1.3 million or 0.3% to $407.9 million from $409.3 million during the two quarters ended July 2, 2010. The decrease in sales was primarily in the communication and computing markets, primarily offset by increases in the industrial and consumer markets. Sales into the communication and computing end markets decreased by 6% and 5%, respectively, compared to the two quarters ended July 2, 2010, while sales into the industrial and consumer end markets increased by 5% each from the same period. Revenues by end market were as follows ($ in millions): Two quarters ended July 1, 2011 July 2, 2010 Revenue % of Revenue Revenue % of Revenue Industrial $ 121.0 29.7 % $ 115.0 28.1 % Computing 111.4 27.3 % 117.0 28.6 % Communication 87.6 21.5 % 93.6 22.9 % Consumer 87.9 21.5 % 83.7 20.4 % Total $ 407.9 100.0 % $ 409.3 100.0 % In aggregate, a 3.7% increase in unit shipments increased net revenue from year-to-date 2010 levels by $15.2 million and ASPs decreased 3.9%, decreasing revenues by $16.5 million. Geographically, year-to-date revenues were derived from the Asia/Pacific, North America and Europe regions as follows ($ in millions): Two quarters ended July 1, 2011 July 2, 2010 Revenue % of Revenue Revenue % of Revenue Asia/Pacific $ 315.0 77 % $ 302.4 74 % North America 58.5 14 % 71.9 18 % Europe and other 34.4 9 % 35.0 8 % Total $ 407.9 100 % $ 409.3 100 % We anticipate that our revenue from Asia/Pacific region customers will continue to grow as that region leads in the manufacture of the finished goods (consumer electronics, computers and communications equipment) in which our products are used. End market demand for those products is global, and therefore, dependent on aggregate global economic metrics and conditions such as personal incomes and business activity and not necessarily on Asian and Pacific Rim regional economic factors. We sell our products to customers in many countries including, in descending order by revenue dollars for our top ten countries, China (including Hong Kong), the United States, South Korea, Taiwan, Japan, Germany, Singapore, Mexico, Thailand, and the Netherlands. Sales to customers in China, including Hong Kong, comprised approximately 54% of revenue, followed by the United States (13%) and South Korea (7%) during the two quarters ended July 1, 2011. Two distributors that support a wide range of customers around the world accounted for 12% and 10% of our revenues in the two quarters ended July 1, 2011. Two original design manufacturers accounted for 9% of our revenues each for the two quarters ended July 1, 2011. 21 -------------------------------------------------------------------------------- Table of Contents Cost of Revenue and Gross Profit Cost of revenue consists primarily of purchased materials and services, labor, overhead and depreciation associated with manufacturing pertaining to products sold. During the quarter ended July 1, 2011, gross profit decreased $6.5 million or 5.0% to $121.8 million from $128.2 million during the quarter ended July 2, 2010. As a percentage of sales, gross margin was 58.2% during the quarter ended July 1, 2011 compared to 58.3% during the quarter ended July 2, 2010. The slight decrease in gross margin was primarily due to fluctuations caused by product sales mix changes at the product family level. Generally, our computing and high-end consumer products have lower gross margins than our industrial and communications products. During the two quarters ended July 1, 2011, gross profit increased $1.7 million or 0.7% to $236.8 million from $235.2 million during the two quarters ended July 2, 2010. As a percentage of sales, gross margin was 58.1% during the two quarters ended July 1, 2011 compared to 57.5% during the quarter ended July 2, 2010. The increase in gross margin was primarily due to various cost reduction initiatives to improve gross margin. We strive to improve gross margins from their present levels by emphasizing new high-margin products and cost saving opportunities in our manufacturing chain. Operating Costs, Expenses and Other Income Research and Development (R&D) R&D expenses consist primarily of salaries and expenses of employees engaged in product/process research, design and development activities, as well as related subcontracting activities, prototype development, cost of design tools and technology license agreement expenses. R&D expenses increased $0.6 million or 1.2% to $47.8 million during the quarter ended July 1, 2011 from $47.2 million during the quarter ended July 2, 2010. We grew our R&D spending primarily through additional employees gained in acquisitions in order to invest in future products and technology essential for long-term growth, offset by cost reduction initiatives to optimize and integrate acquired organizations. R&D expenses increased $8.6 million or 9.7% to $97.5 million during the two quarters ended July 1, 2011 from $88.9 million during the two quarters ended July 2, 2010. We grew our R&D spending primarily through additional employees gained in acquisitions in order to invest in future products and technology essential for long-term growth. Selling, General and Administrative (SG&A) SG&A expenses consist primarily of salaries and expenses of employees engaged in selling and marketing our products as well as the salaries and expenses required to perform our human resources, finance, information systems, legal, executive and other administrative functions. SG&A costs increased by $0.6 million or 1.8% to $36.2 million during the quarter ended July 1, 2011 from $35.6 million during the quarter ended July 2, 2010. The increase was driven by increased sales commissions, compensation expense and increased incentives from additional employees gained in acquisition. SG&A costs increased by $4.1 million or 6.0% to $71.2 million during the two quarters ended July 1, 2011 from $67.2 million during the two quarters ended July 2, 2010. The increase was driven by increased sales commissions, compensation expense and increased incentives from additional employees gained in acquisition. Amortization of Purchased Intangible Assets Amortization of purchased intangible assets decreased $1.4 million or 16.8% to $6.7 million in the quarter ended July 1, 2011 from $8.1 million in the quarter ended July 2, 2010. The decrease resulted primarily from intangibles that became fully amortized during 2011. Amortization of purchased intangible assets increased $2.6 million or 24.0% to $13.6 million in the two quarters ended July 1, 2011 from $11.0 million in the two quarters ended July 2, 2010. The changes resulted primarily from purchased intangibles due to the acquisition of Techwell, offset by intangibles that became fully amortized during 2011. 22-------------------------------------------------------------------------------- Table of Contents Restructuring Restructuring costs were $0.1 million in the quarter ended July 1, 2011, and $2.4 million in the two quarters ended July 1, 2011. The restructuring was part of our ongoing efforts to optimize operations and conclude the integrations of acquired organizations. It included a workforce reduction of approximately 3% and an anticipated reduction in annual operating expenses of approximately $8 million. There were minimal restructuring expenses in the quarter and two quarters ended July 2, 2010. Acquisition-related Costs Acquisition-related costs were minimal for the quarter ended July 1, 2011 and $6.5 million for the quarter ended July 2, 2010. Acquisition-related costs were $0.3 million for the two quarters ended July 1, 2011 and $7.5 million for the two quarters ended July 2, 2010. For all periods, the costs were primarily related to the acquisition of Techwell in the second fiscal quarter of 2010. Other Income and Expenses Interest Income Interest income decreased slightly to $0.7 million during the quarter ended July 1, 2011 from $0.8 million during the quarter ended July 2, 2010. Interest income was $1.5 million during the two quarters ended July 1, 2011 and July 2, 2010. The decrease is due primarily to lower rates earned on slightly higher average cash balances. Interest Expense and Fees Interest expense and fees increased to $4.2 million during the quarter ended July 1, 2011 from $3.2 million during the quarter ended July 2, 2010. Interest expense and fees increased to $8.7 million during the two quarters ended July 1, 2011 from $3.4 million during the two quarters ended July 2, 2010. The increase was due to interest and fees on the long-term debt agreement entered into during the second quarter of 2010 to fund the acquisition of Techwell. (Loss) Gain on Deferred Compensation Investments, Net We have a liability for a non-qualified deferred compensation plan. We maintain a portfolio of approximately $11.7 million of mutual fund investments and corporate owned life insurance under the plan. Changes in the fair value of the asset are recorded as a (loss) gain 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 the quarter ended July 1, 2011, we recorded a minimal loss on deferred compensation investments and an increase in compensation expense of $0.1 million. During the two quarters ended July 1, 2011, we recorded a gain on deferred compensation investments of $0.2 million and a $0.4 million increase in compensation expense. Other-than-temporary Impairment Losses During the quarter ended July 2, 2010, we recorded a $0.1 million loss on the sale of certain investments, before taxes. During the two quarters ended July 2, 2010, we recorded an impairment charge of $1.1 million, before taxes, on certain preferred equity securities whose decline in fair value was determined to be other-than-temporary and a $0.1 million loss on the sale of certain investments, before taxes. We continue to monitor our securities and intend to hold all of these investments until the anticipated recovery in market value occurs. Income Tax Income tax expense for the quarter ended July 1, 2011 was $5.7 million or 20.6% of income before taxes compared with $87.5 million or 311.7% of income before taxes for the quarter ended July 2, 2010. The quarter ended July 2, 2010 included a one-time discrete charge of $79.7 million, due primarily to a provision established upon the completion of field work on a multi-year tax examination. Excluding discrete items, the effective tax rate for the quarter ended July 1, 2011 was lower than the same quarter last year due to a greater portion of income in lower tax jurisdictions. Our tax rate is expected to be approximately 20-22% in future quarters. 23-------------------------------------------------------------------------------- Table of Contents Income tax expense for the two quarters ended July 1, 2011 was $8.8 million or 19.7% of income before taxes compared with $89.4 million or 155.0% of income before taxes for the two quarters ended July 2, 2010. The two quarters ended July 2, 2010 included a discrete charge of $79.7 million due primarily to a provision established upon the completion of field work related to a multi-year tax examination and also included a one-time discrete tax benefit resulting from the donation of our Fab facilities in Palm Bay. The effective tax rate for the two quarters ended July 1, 2011, excluding discrete items, was slightly lower than the prior year due to a greater portion of income in lower tax jurisdictions. In determining net 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. In the ordinary course of business, the ultimate tax outcome of many transactions and calculations is uncertain, as the calculation of tax liabilities involves the application of complex tax laws in the United States and other jurisdictions. We recognize liabilities for additional taxes that may be due on tax audit issues based on an estimate of the ultimate resolution of those issues. Although we believe the estimates are reasonable, the final outcome may be different than amounts we estimate. Such determinations could have a material impact on the income tax provision, effective tax rate and operating results in the period in which they occur. In addition, the effective tax rate reflected in our forward-looking statements is based on current enacted tax law. Significant changes in enacted tax law could materially impact our estimates. Backlog Our sales are made pursuant to purchase orders that are generally booked up to six months in advance of delivery. Our standard terms and conditions of sale provide that these orders may not be cancelled or rescheduled thirty days prior to the most current customer request date for standard products and ninety days prior to the customer request date 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. Our six-month backlog was $174.8 million as of July 1, 2011 compared to $166.3 million as of December 31, 2010 and $227.1 million as of July 2, 2010. Although not always the case, we believe backlog can be an indicator of performance in the near future. Business Outlook In our second quarter 2011 earnings release, filed as an exhibit to our Form 8-K on July 27, 2011, we announced that we anticipate revenues for the third quarter 2011 to be in the range of $205 million to $213 million. Based on this outlook, we stated that we expect third quarter 2011 earnings per diluted share to be between $0.14 and $0.17. Contractual Obligations and Off-Balance Sheet Arrangements Our contractual obligations and off-balance sheet arrangements have not changed significantly from December 31, 2010. As of July 1, 2011, we had committed to purchase $26.4 million of inventory from suppliers. Liquidity and Capital Resources Our capital requirements depend on a variety of factors, including but not limited to, the rate of increase or decrease in our existing business base; the success, timing and amount of investment required to bring new products to market; revenue growth or decline; and potential acquisitions. We believe that we have the financial resources necessary to meet business requirements for the next 12 months, including our dividend program, the requisite capital expenditures for the maintenance of worldwide manufacturing capacity, working capital requirements and potential future acquisitions or strategic investments. As of July 1, 2011, our total shareholders' equity was $1,069.7 million and we had $416.9 million in cash, cash equivalents and short-term securities. In addition, we had $278.2 million in long-term debt outstanding as further described in Note 8 of the accompanying unaudited condensed consolidated financial statements. 24 -------------------------------------------------------------------------------- Table of Contents We had $62.3 million in long-term investments, consisting of auction rate securities (ARS) as of July 1, 2011. These securities are composed of approximately $32.4 million of insurance-related securities, $14.3 million of corporate credit securities and $15.6 million of securities collateralized by student loans. We continue to accrue and receive interest on the securities based on a contractual rate. The weighted rate is currently approximately 194 basis points above one month LIBOR. Our primary sources and uses of cash during the two quarters ended July 1, 2011 and July 2, 2010 were as follows (in millions): Two quarters ended July 1, 2011 July 2, 2010 Sources of Cash Existing business performance and activities Operating activities, including working capital changes $ 80.2 $ 64.1 Exercise of stock options and purchases under the employee stock purchase plan 1.3 3.7 81.5 67.8 Issuance of long-term debt Issuance of long-term debt, net of fees - $ 288.1 - 288.1 Uses of Cash Business improvement investments Business acquisitions, net - (403.5 ) Capital expenditures, net of sale proceeds (5.3 ) (6.7 ) (5.3 ) (410.2 ) Repayments of debt Repayments of debt (20.3 ) - (20.3 ) - Returns to shareholders Dividends paid (30.9 ) (30.1 ) (30.9 ) (30.1 ) Cash/Investment Management Activities (Increase) decrease in investments and foreign exchange effects (17.6 ) 76.2 Net increase (decrease) in cash and cash equivalents $ 7.4 $ (8.2 ) For the two quarters ended July 1, 2011, our operational cash flows were $80.2 million compared to $64.1 million in the two quarters ended July 2, 2010. This increase of $16.1 million was primarily due to the increase in accounts receivable in the two quarters ended July 2, 2010, offset by slightly lower operating income in the two quarters ended July 1, 2011. We used approximately $5.3 million for capital expenditures, $20.3 million to repay indebtedness and $30.9 million to pay shareholder dividends. Investment balances were increased by $17.6 million in the two quarters ended July 1, 2011 with the purchase of $29.0 million of short and long-term investments offset by calls of certain ARS. The resulting cash provided was $7.4 million overall. We strive to continually improve the cash flows from our existing business activities and return a substantial portion of that cash flow to shareholders. We continue to maintain and improve our existing business performance with necessary capital expenditures and acquisitions that may further improve our business and return on investment. Cash, stock, debt or a combination may be issued to fund additional acquisitions to grow our business. Our cash, cash equivalents and investments give us the flexibility to return free cash flow to our shareholders while also pursuing business improvement opportunities for our future. Non-cash Working Capital Trade accounts receivable, less valuation allowances, decreased by $1.0 million or 1.2% to $87.7 million as of July 1, 2011 from $88.7 million as of December 31, 2010. This decrease primarily reflects the decrease in sales offset by increased reserves related to changes in distributor agreements. 25-------------------------------------------------------------------------------- Table of Contents Our net inventories decreased by $2.0 million or 2.0% to $99.9 million as of July 1, 2011 from $102.0 million as of December 31, 2010. Inventories declined from year end as a result of increased sales activity. We maintain stock of certain high volume products to ensure our lead times remain within customer expectations. Capital Expenditures Capital expenditures, net of sales proceeds, were $5.3 million for the two quarters ended July 1, 2011 and $6.7 million for the two quarters ended July 2, 2010. Capital expenditures have been focused primarily on facilities improvements at our Milpitas location, electronic equipment mostly for R&D, and on the expansion of available capacity for test partners to support continuing unit volume growth. We anticipate capital expenditures will remain at current levels in the near term. Proceeds from Exercises of Stock Options and our Stock Purchase Plan Cash flow from stock plans (exercises of stock options and sales under our Employee Stock Purchase Plan, or ESPP) was $1.3 million in the two quarters ended July 1, 2011, compared to $3.7 million received in the two quarters ended July 2, 2010. Exercises are decisions of grantees and are influenced by the level of our stock price and by other considerations of grantees. Recent declines in stock price have resulted in many of our options being "underwater" with exercise prices in excess of the current stock price. While the level of cash inflow from exercises is difficult to forecast or control, we believe it will remain a secondary source of cash. Dividends on Common Stock In April 2011, our Board of Directors declared a quarterly dividend of $0.12 per share of common stock. The dividend was paid on May 27, 2011 to shareholders of record as of the close of business on May 17, 2011. In July 2011, our Board of Directors also declared a dividend of $0.12 per share, to be paid on August 26, 2011 to shareholders of record as of the close of business on August 16, 2011. |