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Call Start: 16:45

Call End: 17:27

Intersil Corporation (NASDAQ:ISIL)

Q4 2012 Earnings Call

January 30, 2013 4:45 pm ET

Executives

Jonathan Kennedy – Chief Financial Officer, Senior Vice President

Jim Diller – Interim President, Chief Executive Officer

Analysts

Christopher Danely – JPMorgan

James Schneider – Goldman Sachs

Tore Svanberg – Stifel, Nicolas

Vernon Essi – Needham

Ross Seymore – Deutsche Bank

Craig Ellis – B. Riley Caris

Steve Smigie – Raymond James

Steve Eliscu – UBS

Sumit Dhanda – ISI Group

Operator

Ladies and gentlemen, welcome to Intersil Corporation’s Fourth Quarter and Fiscal Year End 2012 Earnings Conference Call. I’ll be your coordinator for today. I would now like to turn the presentation over to Jonathan Kennedy, Intersil’s Chief Financial Officer.

Jonathan Kennedy

Thanks, Keith, and good afternoon. Thank you for joining us today for Intersil’s Fourth Quarter and Full Year 2012 Earnings Conference Call. This is Jonathan Kennedy, Intersil’s Senior Vice President and Chief Financial Officer. With me today is Jim Diller, an Intersil Director and Interim Chief Executive Officer. Today, Jim and I will deliver remarks on the fourth quarter and provide a summary of our first quarter 2013 business outlook. After our prepared remarks, we’ll open the line for questions.

We completed our fourth quarter on December 28, 2012. An earnings press release was issued today at 1:05 p.m. The press release and today’s prepared remarks are available on the Investor Relations section of our website at ir.intersil.com. This call is also being webcast live over the Internet and a replay will be available for the next two weeks.

Please note that some of our comments made today during this call may contain forward-looking statements. While these statements reflect our best current judgment, they are subject to risks and uncertainties that could cause our actual results to vary. These risk factors are discussed in detail in our filings with the Securities and Exchange Commission.

In addition, during this call, we may refer to financial measures that are not prepared according to generally accepted accounting principles. We sometimes use these measures because we believe they provide useful information about the performance of our business and should be considered by investors in conjunction with the GAAP measures reported.

I’ll now turn the call over to Jim.

Jim Diller

Thank you, Jonathan, and good afternoon, everyone. First I would like to take a moment to introduce myself. As many of you know, I’ve been a member of the Intersil Board of Directors since 2002 when Intersil acquired Elantec. I have been in the semiconductor industry for over 50 years. I was a founder of PMC-Sierra and served as the CEO from 1984 until 1997. I also was the CEO of Elantec Semiconductor for about two years, retiring in 2000 – in the year 2000. Besides Intersil, I am on the Board of PMC and am currently Chairman of Avago Technologies.

In December, Intersil’s Board appointed me Interim CEO with the primary objective of finding a permanent CEO and operating the company until that occurs. The Board has formed a search committee composed of our Chairman, Don Macleod; Greg Lang, CEO of PMC-Sierra and myself. The Board has engaged a global executive search firm and the process is well underway. And while I can’t predict how long the search will take, I can assure you that it is a priority for myself and the Board.

Before I turn the call over to Jonathan to discuss the financial results, I’d like to make a few comments on our end market results. Revenue from our industrial and infrastructure markets declined $7 million or 8% on broad-based weakness and seasonal trends, typical during the fourth quarter. International distributor inventories, where we recognize revenue on a sell-in basis, continued to decline during the quarter and continued to negatively impact revenue.

The consumer end market declined $2.2 million or 7% on seasonal weakness in the gaming and display markets, offset by moderate strength in handheld where new design wins are driving demand for our light sensor products. Personal computing declined $4.7 million or 14% in an overall weak PC market driven by declines in notebook computer units.

We ended the quarter with a book-to-bill ratio just below 1, and order linearity was mostly even throughout the quarter. At this time, I will turn the call over to Jonathan Kennedy for the financial summary.

Jonathan Kennedy

Thanks, Jim. Let me start with the income statement. We reported $137.5 million in revenue for the fourth quarter, a 9% sequential decrease from the third quarter of 2012 and a 17% decrease from the fourth quarter of last year. Revenue decreased as expected in our three end markets as overall demand continued to be weak with no changes to our lead times or significant supply constraints.

Fourth quarter revenue turns were 35%, and we’re expecting Q1 2013 turns to be about the same at the midpoint of our guidance. Our internal utilization was about 68% as production continued below consumption and internal inventory levels continued to decline. Revenue mix by end market was almost unchanged, resulting in a gross margin of 54%, just slightly below the previous quarter. Looking to Q1 2013, we expect gross margin to remain at a similar level.

R&D expense was $37.6 million or 27% of revenue. And SG&A expense was $33.5 million or 24% of revenue. SG&A expense included $3.1 million of severance costs associated with our former CEO’s departure. Looking ahead to the first quarter, we expect R&D expenses to increase to approximately $41 million and SG&A expenses to decrease to approximately $30 million. Seasonally, the first quarter has more working days than Q4 and therefore higher labor costs. Keep in mind that our GAAP guidance does not include any costs or unusual items typically excluded in the determination of our non-GAAP financial measures.

Amortization of intangibles was $7.6 million during the quarter and Q1 amortization is expected to be lower at about $6.5 million. We recorded $0.7 million in restructuring charges during the quarter related to the closure of a small design center in China. Our GAAP operating loss also included a $1 million benefit from the sale of an unused patent.

Our Q4 GAAP operating loss was $4.1 million or 3% of revenue. Interest income was $0.1 million for the fourth quarter. And interest expense was $7 million, which also included a $5.9 million expense related to the settlement of interest rate swaps upon the pay down of our credit facility.

As expected, our Q4 GAAP tax expense was $10.9 million due to certain discrete tax expense items. We expect our Q1 2013 GAAP net tax benefit to be approximately $4 million as we realize the benefits of the reinstated R&D tax credit.

Equity compensation was $5.3 million for the fourth quarter and Q1 equity compensation is expected to be about the same at $5.3 million. And by classification, it’s expected to be about $0.4 million in cost of sales, $2.6 million in R&D and about $2.3 million in SG&A. On a GAAP basis, we recorded a net loss of $21.8 million or $0.17 loss per share for the quarter.

Now on a non-GAAP basis, we present non-GAAP measures because we believe they add additional analysis that when considered with the GAAP information can help investors more thoroughly understand the results of our normal ongoing operations. Our Q4 non-GAAP estimate exclude equity compensation, restructuring costs, intangible amortization and the related impact on income taxes for these items, for one-time items and also certain discrete tax items.

Non-GAAP operating income was $11.7 million and our non-GAAP operating margin was 8.5%. Our non-GAAP tax rate was 32% and non-GAAP net income was $7.3 million or $0.06 per diluted share for the fourth quarter. A reconciliation between GAAP and non-GAAP measures can be found on Page 7 in today’s press release.

Now let’s talk about the balance sheet and cash flow. Free cash flow during the quarter was $16.4 million and dividend payments were $15.2 million. Long-term debt was reduced to zero during the fourth quarter, but our $325 million revolving credit facility remains in place and available. We repurchased 1.2 million shares at a cost of $8.9 million during the fourth quarter. Our balance sheet continues to be very strong with $163.6 million in cash and investments and no debt. Our days of sales outstanding increased slightly to 39 days for the quarter. Weak demand during the fourth quarter led us to continue our inventory reduction, and our net inventory decreased $6.8 million or 8% from the third quarter to $74.9 million, and our days of inventory increased to 113.

Looking ahead to Q1, we expect inventory dollars to be down another $4 million to $6 million and inventory days to decrease to about 105 days. Our Q4 ending worldwide distributor inventory days were slightly higher than Q3 at approximately 72. But inventory dollars were down approximately 9% versus the third quarter. Q4 depreciation was $4.9 million, flat compared to the third quarter. Our net capital expense was lower than expected at $6.7 million, as we did not spend as quickly as anticipated on our internal fab upgrade. We expect Q1 2013 CapEx to be approximately $8 million to $10 million as we continue the fab upgrade project, albeit at a slower pace. Our weighted average share count was 126.5 million shares in the fourth quarter, and we expect Q1 2013 weighted average shares to be about the same.

I’ll now turn the call back over to Jim.

Jim Diller

Thank you, Jonathan. Now, let’s look at the first quarter outlook. As I mentioned earlier, distributor inventories further declined during the fourth quarter and are at relatively low levels in both dollars and days. Unfortunately, demand visibility remains very low. And it is still difficult to forecast with any certainty. As a result, we are forecasting first quarter revenue to be in the range of $131 million to $138 million or flat to down 5%.

By end market, we expect the computing and industrial markets to increase and be slightly offset by a seasonal decline in consumer. On a GAAP basis, we expect fourth quarter earnings per share to be between $0.02 loss per share and $0.01 earnings per share. We expect to achieve non-GAAP earnings per share between $0.02 and $0.05 per share.

Before I turn the call over for questions, I would like to make a general comment. As you know, I’ve been the Interim CEO for about eight weeks, which includes the Christmas holiday. During this time, I have been focused on recruiting a new CEO and managing the business. Having said that, let me state that both the board and management are keenly aware of our financial performance. At this stage, however, it is premature for me to comment on any possible changes, either structural or on any ongoing R&D projects.

So with that, I would like to turn it over for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And the first question is from the line of Christopher Danely with JPMorgan. Please go ahead.

Christopher Danely – JPMorgan

Hey. Thanks, guys. So Jim, you talked about your expectations for end markets in Q1. Can you just maybe talk about the recent bookings over the last four weeks? I know there were other semi companies that said things are looking and up. And then any thoughts on what you expect the various end markets to do for the year? Or which are recovering a little bit slower? Which are recovering a little bit faster?

Jim Diller

Oh, I’m sure I can answer some of that, having been here only eight weeks though, I’m not sure I can get into that level of detail. But certainly from our perspective, bookings have been spotty. We’ve had some very good days. We’ve had some good weeks and we’ve had some not so good. In total though, it’s essentially flat for us. And that’s why we are guiding the way we are in the first quarter. As far as the end market, for the year, I think it’s premature for me to even comment on that.

Christopher Danely – JPMorgan

Sure. And then...

Jim Diller

Jonathan can take a shot at it.

Jonathan Kennedy

Yeah, one other thing too, Chris, on the bookings trending, there’s Chinese New Year that typically is – there’s a build-up in orders for us typically before Chinese New Year and then after that, you kind of get the sense of how unusual that may or may not have been. And so, I know I’ve seen some other guys talking about bookings strength. We’ve seen it be relatively flat and other than the (inaudible) New Year, we haven’t seen anything that is unusual.

Christopher Danely – JPMorgan

Got it. And then if we’re all hopefully getting back to normal seasonality, I’m knocking on wood as we speak, how should we think about normal seasonality for Intersil for the rest of the year, i.e. Q2, Q3 and Q4?

Jonathan Kennedy

Well, for us – I mean we have – there are some pockets of our business that are seasonal. But if you did an overall analysis, and I’ve done this before many times, there really is very little real seasonality. But if you think of the pockets for us in consumer, we have gaming. And gaming for us in any given quarter is several million dollars.

And that goes up and down and goes off in Q1, and starts to build up in Q2 and Q3, hits a peak and starts to decline in Q4. So there’s some natural seasonality in consumer for us. The computing business, I don’t know that there’s seasonality in that anymore. It’s been strong in Q4’s, it’s been strong in Q1’s, it’s been weak in both of those quarters.

And then industrial and infrastructure market typically can be stronger in the first quarter. We’ve seen some of the more industrial bent peers be a little bit stronger in the first quarter. Our industrial market, as Jim said, we think it’ll be down slightly in the first quarter, but seasonally, it goes up and down. Usually, the fourth quarter’s the weakest quarter for industrial and Q1 is stronger, but it’s hard to tell any real trend out of the data.

Christopher Danely – JPMorgan

Okay. And then just one quick follow-up for Jim. Jim, I know you can’t give us too much detail on the CEO search. Do you think that this will be solved, let’s call it, before the summer? And do you think that you will wait until the new CEO comes in to make any changes or could changes occur before the new CEO is signed up?

Jim Diller

Well, the first part of the question is I – first of all, we are in the middle of the search as we speak. The search committee’s met several times. We are actually in the process of interviewing people. We’ve already talked to several and I’m reasonably optimistic. Now I would expect it would be solved before the end of the summer. As – with respect to any changes, I’ll go back to my general comment. I haven’t been here long enough and we do understand where we are, but we’re not – I’m not in any position to talk about what we may or may not do in the near term.

Christopher Danely – JPMorgan

Okay. Thanks a lot, guys.

Operator

Your next question is from the line of James Schneider with Goldman Sachs. Please go ahead.

James Schneider – Goldman Sachs

Good afternoon. Thanks for taking my question. I was wondering if you could give us a sense of roughly in Q4, what percentage of sales came from those top 10 growth driver areas. And until a new CEO is announced, are you still managing the business to that kind of thing where you’re prioritizing investment in R&D, so those top 10 areas, and giving less investment to the others?

Jim Diller

Well, as far as what we’re doing in R&D, we are, on a continuous basis, we’re reviewing all of our projects. There’s no changes we’ve made at this stage. We are looking at our return on investment and how we’re doing on execution. So, I’ll let Jonathan discuss what the mix of sales were during the fourth quarter.

Jonathan Kennedy

Yeah, Jim, we don’t – we haven’t and don’t really intend to break out revenue by top 10. As you know, some of those top 10, one of them is computing. The entire computing market, which we do give. Other ones are small nascent businesses and suffice it to say that the detail that we give in the end market is what we’re going to give.

James Schneider – Goldman Sachs

Okay. Fair enough. And then on the PC market specifically, if we could just drill down there for a second, can you talk about what your customer inventory levels seem to be? Your guidance actually for computing seems to be a little bit stronger than what some peer reports would suggest, so do you think that all got flushed out in Q4? Or are there some new programs ramping in Q1 that are benefiting you?

Jonathan Kennedy

The inventory is really low, there’s no doubt about that, and so we’re probably on a – probably less than 30 to 40 days of PC inventory in our channel. There are some programs that saw a delay last quarter, in the second half of last year, some major notebook platforms that saw a delay that are starting to build up and so that might be helpful for us. Other than that, there’s really nothing to point to in the PC space.

James Schneider – Goldman Sachs

And then just one last one for me would be in terms of OpEx trends, Jonathan, for the year, if sales start to recover from here, would we expect OpEx to start ticking back up again a little bit? Or are you going to remain constrained until you’ve got more visibility and the new CEO is appointed?

Jonathan Kennedy

Well, I think that there’s – let’s say that under a normal course, we would have OpEx being higher in Q1, Q2’s typically flatter. Q3 starts to come down and Q4 is the lowest. And I think those overall trends are going to be in place in any scenario. As far as giving guidance for the rest of the year, as Jim said, it’s just too early to talk about anything that may or may not change as a result of the CEO. When the new CEO comes on board, he or she will have, I’m sure, lots of things to want to work on, but we’ll just have to wait until that happens before we hear more.

James Schneider – Goldman Sachs

That’s helpful. Thanks so much.

Operator

Your next question is from the line of Tore Svanberg with Stifel, Nicolaus. Please go ahead.

Tore Svanberg – Stifel, Nicolaus

Yes. Thank you. First of all, Jonathan, did I hear the free cash flow number correctly? It was actually higher than your dividend payout.

Jonathan Kennedy

That’s correct. That’s correct.

Tore Svanberg – Stifel, Nicolaus

Okay. And at this revenue level going forward, I mean, is that sort of the free cash flow number? I’m just wondering if there was any sort of discrete items in the quarter, or do you think this is the free cash flow number at this current revenue level?

Jonathan Kennedy

Well, I think if you’re trying to predict like a normalized free cash flow, that’s fairly close. We had some asset changes, we had some inventory come down, but we also had inventory reserves go up. So I think one of the numbers to look at, on Page 6 of our press release, we talk about EBITDA, and that EBITDA is kind of a, I don’t know, maybe a good proxy for what normally cash flow might be in a quarter. So, EBITDA this quarter was $13.7 million and free cash flow was $16.4 million. So, that’s a good triangulation of it. But you can see that it pretty much covers the dividend in either case. And as I said in my opening remarks, we still have $164 million in cash, we’re generating cash. And we have a substantial line of credit that is completely untapped at this point.

Tore Svanberg – Stifel, Nicolaus

Very good. And your inventories were down quite a bit this quarter. You’re expecting another decline in March. At what point do you sort of slow that down and when can we start to see gross margin maybe moving in the other direction again? I mean, you said your bookings are spotty, but at some point, I guess you’d start sort of reversing that trend?

Jonathan Kennedy

Yeah. It’s a good point. Inventory, so if you look at the inventory in our books, most of it is specialty inventory, industrial inventory, so it’s military space and some other communications inventory. A lot of it, we have quite a bit of days inventory on average. Outside of the consumer and PC, we might have a year for the inventory. So there’s some room to move in terms of bringing, continuing to bring inventory down. It’s a good thing to generate cash; it’s a bad thing for gross margins over extended period of time.

I wouldn’t look for revenue to come back up before you saw us start to build inventory again. And it’s hard to predict when that’s going to occur given the guidance for Q1. We see flat revenue, but inventory to come down if – pick a scenario, our revenue continuing to stay flat, we should get inventory down into the 75 to 80 days. And what I guided to, just over 100 days in Q1, so we’ve still got some room to move on inventory.

Tore Svanberg – Stifel, Nicolaus

Okay. And last question is your CapEx was low. It’s going to remain low. You decided to slow down the upgrades for your fab. Just trying to understand the rationale there and when would you potentially accelerate that CapEx again?

Jim Diller

Let me comment on the fab. What we’re doing with the fab is we are in a pause mode while we’re reviewing exactly what makes the most sense in terms of what we put in there and what we don’t put in there, et cetera. So, I wouldn’t say we slowed it down except it’s on a pause while we’re reevaluating it.

Tore Svanberg – Stifel, Nicolaus

Perfect. Great. Thank you so much.

Operator

Your next question is from the line of Vernon Essi with Needham. Please go ahead.

Vernon Essi – Needham

Thank you very much. Jonathan, I was wondering sort of maybe a rearview mirror question here, but your gross margins through the years seem to track favorably with some pretty significant revenue declines. And I know there’s mix that plays a role there with the computing side. But can you just discuss sort of how that played out? Maybe going forward, are you positioned better to lever the gross margin front? I mean it just seems like this – the conventional wisdom of the computing being a pretty low gross margin didn’t seem to play out as bad as you would’ve thought in the last couple of quarters.

Jonathan Kennedy

Well, I mean mix is by far the number one input to any change in our gross margin. When revenue comes down to the levels it is today, then our fixed overhead spending starts to play a role and you have sort of the law of small numbers where a million dollars in overhead actually makes the gross margin move. So, to your original question, Vern, yes, as revenue comes up, we do seem some help. We get a lot more absorption or utilization on our fab. We also get utilization on consigned equipment that we have at our outside foundries and test houses.

So, we do get a little bit, but you won’t see our gross margin move up several hundred points. It goes between the 54% range to maybe as high as 57.5%, 58% in a scenario between $140 million in revenue and $200 million in revenue. That’s the range that sticks in. And that’s the nature of being fabless. By far, the volatile part of our business is outsourced and most of which is on a fixed price. There’s a little bit of absorption because we do have consigned equipment, but for the most part, it doesn’t help much.

Vernon Essi – Needham

Okay. And just – just to follow on, I guess – I know you’re not going to talk about any sort of strategic measures going forward, but it seems as though there was a little bit more cleaning, if you will. You had a pretty sizable charge, I guess, in the quarter, so seems to me that perhaps you might get a little bit better traction on the gross margin front than where you’re at. I mean could we consider this sort of a trough, if you will, if revenue even goes sideways from here?

Jonathan Kennedy

It’s hard to tell, Vern. I mean the gross margin stays plus or minus 100 points from here without running real fancy, complicated models. It just doesn’t move around very much. The E&O, it’s just a couple of pieces of specific inventory that were consumer based that led to E&O being double what it typically is. And doesn’t answer your question very well, but there’s just not a lot of movement in our gross margin in either direction with any sort of speed.

Vernon Essi – Needham

Okay. Thank you.

Operator

Your next question is from the line of Ross Seymore with Deutsche Bank. Please go ahead.

Ross Seymore – Deutsche Bank

Hi, guys. A couple cash questions for you, first, can you just walk through the logic that you used to pay down the debt? Because if I recall right, the rate on the debt is still at or slightly below what you guys have for a dividend yield?

Jonathan Kennedy

Yeah. So we pay down the debt really as a way to save interest expense, I mean, straightforward, if you don’t carry a balance on our debt, if you’ve got the cash. And we have historically not had the cash onshore to pay the debt off. When we settled our liabilities with the IRS late last year, we did some tax planning and were able to move enough cash onshore to pay the debt off. So when you compare what we were earning on our cash at 20 basis points versus what we were paying on the debt, which was cheap, but still 200 basis points greater than what we were earning, the arbitrage wasn’t good, and so we decided to pay it off. Now, it’s a revolver, so we can still take it back. So in the end of the day, we were paying to keep debt on the books that we no longer needed.

Ross Seymore – Deutsche Bank

Got you. And as far as the share repurchase plan, how much of that is still outstanding out of the roughly $50 million, I think, you approved?

Jonathan Kennedy

Right. The Board approved $50 million; we did $15 million. We did that through early September, but we haven’t been active in the market for a couple of months. And as Tore pointed out, with free cash flow being approximately dividend, we’re probably unlikely to continue to spend cash on that until operating cash flow picks back up. So we have a plan in place. We’re opportunistic about it. The $15 million we spent as of today’s price was a good deal. But we’re going to go slow and easy with that based on cash flow with the rest of the company.

Ross Seymore – Deutsche Bank

Got you. And then last one on the cash flow front. CapEx for the full year, any sort of general guidance on that? And I realize there’s a lot of moving parts with the company right now.

Jonathan Kennedy

Well, if you recall from the last conference call, I said we were probably going to spend about $20 million on this fab upgrade, $10 million last quarter and about $10 million planned for Q1. And we did about $7 million in Q4. And I said we’d probably do another $8 million or so in Q2. Outside of that particular project, our normal CapEx is in the $2 million to $4 million a quarter range, and it goes up to $4 million when business is really good and when you test equipment, and it goes down to $2 million or even below when business is not growing. So that should give you a good idea if you want to model the rest of the year, excluding that fab upgrade, it’s pretty much as it’s been for the last three years or so.

Ross Seymore – Deutsche Bank

Got you. Thank you.

Operator

Your next question is from the line of Craig Ellis with B. Riley Caris. Please go ahead.

Craig Ellis – B. Riley Caris

Hey, Jonathan. Thanks for taking the question. I’m wondering if you and Jim can just take a step back and Jim, I don’t know if this is fair game or not, in looking at the decision that you’re making around the CEO replacement, can you just frame for us some of the things that you’re prioritizing and looking for as you go out and do the search? And help us understand the timeframe with which you’d like to have something done, whether it’s by the end of the first calendar quarter or if the Board is really trying to get something done by the end of the second calendar quarter?

Jim Diller

All right. Well, hell, I can comment on that. First of all as to the spec, so to speak, of what we’re looking for, we’re looking for someone who has a proven, and a lot of this is motherhood and the flag, but we are looking for someone who has a proven track record of growing businesses in a very solid financial way. Clearly, we’re only looking in the semiconductor world; we’re not looking to bring anybody in who is not a semiconductor person. Whether the person has been a CEO or not is a consideration, but I wouldn’t put it anywhere near the top of the list. If we can find someone in a company that was running a business of our size or larger, who has a very good track record doing it, then that would be – make him – he or she a very viable candidate. Conversely, if we can find a CEO who’s had a success record, we will consider that.

So basically, it’s a little bit like the, in the sports analogy, we’re looking for the best athlete. We’re looking for somebody who can really provide leadership, strategic direction, get into the business and really understand it and provide that direction and can lead this company to where we think we can take it.

As to the timing, it is a very, very high priority for the Board as well as, as you can expect, me. I mean I retired 13 years ago, so this is – this was not on my agenda, but I’m glad I’m here and I think we’re doing the right thing. So, it’s very hard to predict. I mean I think I would be optimistic that certainly before the end of the second quarter, we will have this position filled and possibly a lot sooner because we are talking to people right now as we speak.

Craig Ellis – B. Riley Caris

Thanks for that color, Jim. And then Jonathan just to follow up on Ross’s question and you might have mentioned it, but what percent of the cash is now in the U.S. versus outside the U.S.? And how much do you think you need to run the business on a day-to-day basis?

Jonathan Kennedy

Well, right now, we have – the majority of our cash is offshore. But as I said in my comments, we do have this $325 million credit line that is essentially onshore liquidity, if you will. And we’ve got, I should say, plans or expectations that we’ll be able to continue to repatriate enough cash to pay the dividend for a – for the foreseeable future. So, I don’t think domestic versus international cash is really an issue for us given the situation we’re in with the revolver, with our normal ongoing cash. So if you think about it, Craig, we’re constantly bringing cash back to the United States to cover the costs in the United States. And that’s a constant source of cash flow for us.

Craig Ellis – B. Riley Caris

Okay. Thanks for the help, guys.

Operator

Your next question is from the line of Patrick Wang with Evercore Partners. Please go ahead.

Unidentified Analyst

Hi, guys. This is Mike on for Patrick. How you guys doing?

Jonathan Kennedy

Good, Mike.

Unidentified Analyst

You talk about bookings overall being flat. Could you maybe talk about bookings by end markets? Were there any standouts?

Jonathan Kennedy

We don’t normally get into that level of detail, and therefore, I don’t even know enough detail to get into it. I can tell you that I’m not aware of anything that was a standout, and if there was, I would be. So I would say it has been a – relatively flat across the board.

Unidentified Analyst

Yeah, that’s fair. I know you said visibility is pretty poor, but do you think that 1Q marks the bottom for revenues at this point?

Jonathan Kennedy

Hope so.

Jim Diller

We hope so. I wish I knew.

Unidentified Analyst

Hope so?

Jim Diller

I wish I knew.

Unidentified Analyst

Al right, and last question. Industrial, you talk about it being seasonally up, but you’re guiding it down. What’s the delta in seasonality versus your view?

Jonathan Kennedy

Well, for us, our industrial space is much more heavily weighted towards automotive. And automotive, it’s pretty much back-up cameras and infotainment. And so, it doesn’t have the same typical seasonality. And then also, we have military business that is also not exactly the same as the broad-based industrial market. So, it’s kind of the – our concentration or our mix of industrial versus say the broader market.

Unidentified Analyst

Okay. Sounds good. Thanks, guys.

Operator

(Operator Instructions) And your next question is from the line of Steve Smigie with Raymond James. Please go ahead.

Steve Smigie – Raymond James

Great. Thank you. Jonathan, in the event that we saw stronger pickup in the economy, can you talk a little bit about OpEx and what you’ve done in terms of say constricting merit pay, so could we see a larger jump in OpEx than we’d normally expect if say the economy got a lot better all of a sudden? Or what are you going to – what are the plans absent any major changes from a new CEO, would you still try to keep those in a more – a tighter range?

Jonathan Kennedy

Steve, I mean for Q1, I don’t feel like there’s a major upside in revenue that’s going to drive OpEx up because of sales commissions or performance pay or anything like that. The way our bonus plan works, it’s a percentage of operating income. I guess in some scenarios, you could see that drive up, but it’s not that significant of a number that would drive OpEx from higher revenue. I mean think of our OpEx level today, we’re sized to be $800 million to $1 billion company without really any increases in OpEx. So I wouldn’t think there’s anything naturally about more revenue equaling more OpEx.

Jim Diller

I would second that. I would not expect that to happen.

Jonathan Kennedy

Yeah. And then if I can, Steve, let me just go back to Mike’s question too on the industrial, so make sure I was clear enough when I answered that. So we guided the industrial market to actually be up slightly in regards of what I just said, it would be up slightly and that would be more in line with what we’ve seen out there in the market.

Steve Smigie – Raymond James

Okay. Great. I don’t have any follow-ups at this time. Thanks.

Jonathan Kennedy

Okay.

Operator

Your next question is from the line of Steve Eliscu with UBS. Please go ahead.

Steve Eliscu – UBS

Yes. Thank you. Jim, without commenting on any changes that you may make near term, can you give us a sense as to – with two months that you’ve been at the helm, what you’ve observed as Intersil’s strengths? And also to help us understand what type of individual you are looking for, for the CEO role, can you help us understand, as you alluded to, the Board’s vision for what type of company Intersil should be?

Jim Diller

That covers a broad – a broad range of categories there, but my feeling on Intersil is that we have very strong technology. I think we have all of the capability of being a very, very successful company. And what we need is a leader to come in here and harvest that. What I commented earlier about the kind of person we’re looking for, we’re looking for a solid, semiconductor-experienced person. That individual could come out of sales, marketing, operations, we don’t have any preconceived ideas as to the background other than they must have been very successful in running a business. Their heritage prior to running that business is not a big deal for us, but that’s probably our number one criteria.

Steve Eliscu – UBS

Right.

Jim Diller

I strongly believe, and that’s why I’m here, I strongly believe that when we get this individual on board, with Intersil’s rich technology base and what we’ve been able to do in the past, I think we can make this a very successful company. And that’s why I’m here and that’s what we’re set out to do along with the rest of the Board, and the management team, by the way.

Steve Eliscu – UBS

Right. That’s very helpful. And then just more specifically, just looking at the PC market, you’ve talked about with regards to the Vcore products that you have some newer products that have significantly higher ASPs, focused, you’ve talked about tablets or Ultrabooks generically, but with the challenges in that part of the market, specifically the growth of high-end Ultrabooks has been – the penetration has been pretty limited so far. How does that influence how you see your ability to succeed this – in 2013 in what’s supposed to be a relatively flat PC environment?

Jim Diller

Well, again, I think going back to my general comment and I know that doesn’t help particularly, but we are – continuously evaluate all of our R&D projects. I mean we spend a fair amount of money on R&D as you well know because you study the OpEx. And we are looking at our projects very carefully to make sure we’re getting the return on that investment. It’s way too early for me to be making comments about what businesses are going to do better than others because I haven’t been here long enough. But I think it’s safe to say that we are reviewing very carefully all the various things we’re doing.

Steve Eliscu – UBS

Great. Thank you.

Operator

Your next question is from the line of Sumit Dhanda with ISI Group. Please go ahead.

Sumit Dhanda – ISI Group

Yes. Hi, guys. Jonathan, the first question, just a – on your comment on distribution inventories at 72 days, which is up from 70 last quarter, which was up six days from the prior quarter, so help me understand why you think the channel is as lean as you commented in your prepared remarks given the trajectory there?

Jonathan Kennedy

Sure, so the day – you’re using the days. If you use dollars, the numbers would actually be inverted from what you pointed out. And so, what’s happened as channel inventories tend to build up and then as revenue comes down, you’re constantly chasing this revenue number on the downward slope. If you look at it on an absolute dollars basis, we’re at one of the lowest dollars basis inventory in a long time, probably three years. And so from a – from that perspective, we think they’re lean. Now at the – ultimately, it’s end demand that determines whether or not the channel inventory is lean or it’s not, and if you look at it on days, it would appear that it’s about where it normally is, maybe slightly on the high side. If you look at it in the dollars, it looks very low.

Sumit Dhanda – ISI Group

I guess I understand, not to berate the point, but seems like your sales are at the lowest level in three years too, so wouldn’t the thought be given the lack of visibility around the business to actually right-size the channel a little more? Or do you feel like you get – you’ll get caught short on the other side even in a modest recovery scenario?

Jonathan Kennedy

Well, the channel, like any other inventory pile, has a good mix of inventory. And some of the channel inventory may be at 30 days and the computing inventory is probably in the 35 to 40 days right now. There are other industrial parts of the channel that are loaded up for beyond 72 days. So, each individual piece has its different attributes. So for the industrial, it will continue to come down. The computing and consumer I think is at a very low level, and that’s the stuff that’s typically – has a lot more velocity in any sort of turn-around and semiconductor demand where the industrial and communications products do not.

Sumit Dhanda – ISI Group

Okay. Gotcha.

Jonathan Kennedy

But I mean we do expect channel inventory to continue to come down in the first quarter versus Q4.

Sumit Dhanda – ISI Group

And that’s both on a days and dollars basis?

Jonathan Kennedy

I think so, because if inventory comes down and revenue stays flat, then days will come down.

Sumit Dhanda – ISI Group

Gotcha. Okay. I guess the other question I had was I understand your comment about having more working days in the March quarter. But it seems like the pop in R&D is perhaps a little more than at least I would have anticipated. Any specific reason for that?

Jonathan Kennedy

Mostly driven by additional days, and then there are lumpiness to R&D with mask sets and wafer costs that can be spikes in there. I don’t have details for you to tell you the quarter-to-quarter change, but for the majority of it is labor.

Sumit Dhanda – ISI Group

Okay. Thank you so much.

Operator

And we have time for one more question. You have a follow-up from the line of Christopher Danely with JPMorgan. Please go ahead.

Christopher Danely – JPMorgan

Hey, thanks, guys. Just two quick muddling questions; Jonathan, what’s depreciation expected to be for the year and then what will your tax rate be after Q1?

Jonathan Kennedy

Depreciation for the year should be in the $20 million range. Tax rate on a non-GAAP basis for the year should be in the 25% range. On a GAAP basis, we will probably be in the mid-teens because – just to give you a heads up, for Q1, we’re going to see, I said, a $4 million tax benefit, and that’s pretty much regardless of where revenue turns out to be. And that’s because we have the R&D tax credit that was reinstated at the very end of last year, but after our fiscal year end. We ended on December 28 and I think the credit got put back in on January 4 or something like that. So we’re going to take the entire 2012 R&D tax credit benefit in our first quarter of 2013, plus we’ll get the R&D tax credit benefit for 2013 Q1, all-in Q1. But if you look at it on a normal basis, we should be in the mid to high-teens on a GAAP basis.

Christopher Danely – JPMorgan

Got it. Thanks a lot.

Jonathan Kennedy

Okay.

Operator

And at this time, I’d like to turn the call over to Mr. Jim Diller for some closing comments.

Jim Diller

All right, well thank you for joining us today and for this fourth quarter earnings conference call and have a good evening. Good bye.

Operator

Ladies and gentlemen, that will conclude today’s conference. Thank you very much for joining us and you may now disconnect. Have a good day.

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