<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
---------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
-------------------- ---------------------
COMMISSION FILE NO. 1-7935
------------------------------------------------------------
INTERNATIONAL RECTIFIER CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-1528961
---------------------------------- -------------------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
233 KANSAS STREET
EL SEGUNDO, CALIFORNIA 90245
- ---------------------------------------- -----------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 726-8000
NO CHANGE
- ----------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
----- -----
THERE WERE 51,532,002 SHARES OF THE REGISTRANT S COMMON STOCK, PAR VALUE
$1.00 PER SHARE, OUTSTANDING ON NOVEMBER 16, 1998.
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE
REFERENCE
----------
ITEM 1. FINANCIAL STATEMENTS
Unaudited Consolidated Statement of
Income for the Three Month Periods
Ended September 30, 1998 and 1997 2
Unaudited Consolidated Statement of
Comprehensive Income for the Three Month
Periods Ended September 30, 1998 and 1997 3
Consolidated Balance Sheet as of
September 30, 1998 (unaudited) and
June 30, 1998 4
Unaudited Consolidated Statement of
Cash Flows for the Three Month
Periods Ended September 30, 1998
and 1997 5
Notes to Unaudited Consolidated
Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 13
PART II. OTHER INFORMATION
NONE
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Revenues $127,493 $133,111
Cost of sales 91,283 88,160
-------- --------
Gross profit 36,210 44,951
Selling and administrative expense 24,207 25,348
Research and development expense 10,021 8,731
-------- --------
Operating profit 1,982 10,872
Other income (expense):
Interest, net (2,451) (1,627)
Other, net 518 (148)
-------- --------
Income before income taxes 49 9,097
Provision for income taxes 15 3,002
-------- --------
Net income $ 34 $ 6,095
-------- --------
-------- --------
Net income per common share - Basic $ 0.00 $ 0.12
-------- --------
-------- --------
Net income per common share - Diluted $ 0.00 $ 0.12
-------- --------
-------- --------
Average common shares outstanding - Basic 51,514 51,150
-------- --------
-------- --------
Average common shares and potentially dilutive
securities outstanding - Diluted 51,519 52,011
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of this statement.
2
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
1998 1997
------ -------
<S> <C> <C>
Net income $ 34 $ 6,095
Other comprehensive income:
Foreign currency translation adjustments 2,030 (1,904)
------ -------
Comprehensive income $2,064 $ 4,191
------ -------
------ -------
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30,
1998 June 30,
(unaudited) 1998
------------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 31,876 $ 32,294
Short-term investments -- 13,232
Trade accounts receivable, net 121,663 129,738
Inventories 129,058 130,653
Deferred income taxes 8,080 8,080
Prepaid expenses 3,967 3,253
-------- --------
Total current assets 294,644 317,250
Property, plant and equipment, net 410,561 390,892
Other assets 22,409 27,685
-------- --------
Total assets $727,614 $735,827
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank loans $ 14,243 $ 28,153
Long-term debt, due within one year 38,928 37,226
Accounts payable 44,207 46,637
Accrued salaries, wages and commissions 15,713 15,875
Other accrued expenses 23,530 26,042
-------- --------
Total current liabilities 136,621 153,933
Long-term debt, less current maturities 159,902 141,528
Other long-term liabilities 16,123 29,352
Deferred income taxes 12,081 11,364
Stockholders' equity:
Common stock 51,528 51,351
Capital contributed in excess of par value 256,191 255,195
Retained earnings 98,680 98,646
Accumulated other comprehensive income (3,512) (5,542)
-------- --------
Total stockholders' equity 402,887 399,650
-------- --------
Total liabilities and stockholders' equity $727,614 $735,827
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 34 $ 6,095
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 11,426 9,375
Deferred income (150) (150)
Deferred income taxes 656 5,713
Deferred compensation (6,241) (98)
Change in working capital 5,999 (11,130)
-------- --------
Net cash provided by operating activities 11,724 9,805
-------- --------
Cash flow from investing activities:
Additions to property, plant and equipment (27,776) (18,975)
Purchase of short-term investments - (18,000)
Proceeds from sale of short-term investments 13,232 16,850
Return (investment) in other noncurrent assets 4,561 (949)
-------- --------
Net cash used in investing activities (9,983) (21,074)
-------- --------
Cash flow from financing activities:
Proceeds from issuance of short-term bank debt, net (14,840) 10,631
Proceeds from issuance of long-term debt 38,047 140
Payments on long-term debt and obligations
under capital leases (19,270) (3,869)
Net proceeds from issuance of common stock 1,160 1,470
Decrease in other long-term liabilities to be
financed with long-term debt (9,423) (3,074)
Other 1,949 1,103
-------- --------
Net cash provided by (used in) financing activities (2,377) 6,401
-------- --------
Effect of exchange rate changes on cash and
cash equivalents 218 (150)
-------- --------
Net decrease in cash and cash equivalents (418) (5,018)
Cash and cash equivalents beginning of period 32,294 36,564
-------- --------
Cash and cash equivalents end of period $ 31,876 $ 31,546
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of this statement.
5
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. BASIS OF PRESENTATION
The consolidated financial statements included herein are unaudited,
however, they contain all normal recurring accruals which, in the opinion
of management, are necessary to present fairly the consolidated financial
position of the Company at September 30, 1998 and the consolidated results
of operations and cash flows for the three month periods ended September
30, 1998 and 1997. It should be understood that accounting measurements
at interim dates inherently involve greater reliance on estimates than at
year end. The results of operations for the three month period ended
September 30, 1998 are not necessarily indicative of the results to be
expected for the full year.
The accompanying consolidated financial statements do not include
footnotes and certain financial presentations normally required under
generally accepted accounting principles and, therefore, should be read in
conjunction with the Annual Report on Form 10-K for the year ended June
30, 1998.
Effective July 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income",
and accordingly has included a separate statement of comprehensive income
following the Company's Consolidated Statement of Income. Comprehensive
income generally represents all changes in shareholders' equity during the
period except those resulting from investments by, or distributions to,
shareholders. The balance of accumulated other comprehensive income at
September 30, 1998 consists of accumulated foreign currency translation
adjustments.
2. NET INCOME PER COMMON SHARE
Net income per common share - Basic is computed by dividing net income
available to common shareholders (the numerator) by the weighted average
number of common shares outstanding (the denominator) during the period.
The computation of net income per common share - Diluted is similar to the
computation of net income per common share - Basic except that the
denominator is increased to include the number of additional common shares
that would have been outstanding if the dilutive potential common shares
had been issued.
The following table provides a reconciliation of the numerator and
denominator of the basic and diluted per-share computations for the three
months ended September 30, 1998 and 1997 (in thousands except per share
amounts):
<TABLE>
<CAPTION>
NET INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Three Months ended September 30, 1998
Net income per common share - Basic... $ 34 51,514 $ 0.00
Effect of dilutive securities:
Stock options ..................... 5
-----------------------------------------
Net income per common share - Diluted.... $ 34 51,519 $ 0.00
-----------------------------------------
-----------------------------------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
NET INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Three Months ended September 30, 1997
Net income per common share - Basic... $ 6,095 51,150 $ 0.12
Effect of dilutive securities:
Stock options...................... 861
-------- ------ -------
Net income per common share - Diluted.... $ 6,095 52,011 $ 0.12
-------- ------ -------
-------- ------ -------
</TABLE>
3. INVENTORIES
Inventories are stated at the lower of cost (principally first-in,
first-out) or market. Inventories at September 30, 1998 (unaudited) and
June 30, 1998 were comprised of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 JUNE 30, 1998
------------------ -------------
<S> <C> <C>
Raw materials $ 18,598 $ 21,101
Work-in-process 57,557 56,224
Finished goods 52,903 53,328
-------- ---------
$129,058 $ 130,653
-------- ---------
-------- ---------
</TABLE>
4. LONG-TERM DEBT AND OTHER LOANS
On August 28, 1998, the Company replaced an existing $2.5 million
revolving line of credit with a new $24.9 million unsecured credit
facility, both with the same foreign bank. The new agreement provides the
Company with a five-year $8.3 million revolving line of credit, and a
five-year $16.6 million term-loan facility, with principal retirements
beginning after 30 months. The interest rate on both facilities is based
on 1% above the applicable LIBOR rate.
A summary of the Company's long-term debt and other loans at September 30,
1998 is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
-------------
<S> <C>
Capitalized lease obligations payable in varying monthly
installments primarily at rates from 6.0% to 10.7% $ 489
Domestic bank loans collateralized by equipment, payable in
varying monthly installments at rates from 6.4% to 8.7%, due
in 1999 through 2004 46,913
Domestic unsecured bank loans payable in varying monthly
installments at rates from 6.3% to 6.5%, due in 2000
through 2003 109,339
Foreign bank loans collateralized by property and/or equipment,
payable in varying monthly installments at rates from 6.4% to
10.8%, due in 1998 through 2003 25,783
Foreign unsecured bank loans payable in varying monthly
installments at rates from 2.6% to 8.4%, due in 1999
through 2006 16,306
--------
198,830
Less current portion of long-term debt (38,928)
--------
$159,902
--------
--------
</TABLE>
7
<PAGE>
5. IMPAIRMENT OF ASSETS AND RESTRUCTURING CHARGE
During the fourth quarter of fiscal 1997, the Company recorded a $75
million pretax charge related to a restructuring program designed to
improve the Company's competitive position and further accelerate growth
and earnings by streamlining operations and administration. The charge
was composed of $65 million for the write-down of assets and $10 million
for termination benefits to be paid in connection with the elimination of
approximately 150 positions.
As of September 30, 1998, the Company had recorded $65 million in non-cash
asset write-offs and paid $7.7 million for termination benefits relating
to the restructuring program. The remaining unutilized restructuring
accrual of $2.3 million relates to positions that have been or will be
eliminated during the rest of fiscal year 1999.
6. YEAR 2000 READINESS
The "Year 2000 Issue" is the result of many existing computer programs and
embedded microprocessors using only two digits to refer to the year. The
year 1998, for example is represented in such a two digit system as "98".
Beginning in the year 2000, these systems will need to be modified to
distinguish 21st century dates from 20th century dates. As a result,
computer systems and/or software used by many companies may need to be
adapted to meet these requirements. The disclosures contained herein are
Year 2000 statements and constitute a Year 2000 Readiness Disclosure under
Public Law No. 105-271.
The Company has adopted the definition of Year 2000 conformity published
by the British Standards Institute (BSI) as DISC PD2000-1. The adoption
of this standard as a target for compliance does not guarantee that the
Company's products or operations will be in full Year 2000 conformity as
detailed in this definition. Currently, none of the Company's products
contain date processing logic. The Company therefore represents to
purchasers that its products are Year 2000 compliant pursuant to the BSI
DISC PD2000-1 definition.
The Company has established a Global Year 2000 Team as well as local site
teams. Both the Global and the local site teams consist of management as
well as operational and information technology staff members. The Global
2000 Team was formed to address company-wide Year 2000 issues, such as
overall project integration and management, project schedules, and
reporting to management. Local site teams address research and
remediation for site specific equipment, facilities and suppliers. Both
the Global and local site teams are divided into the following functional
areas: (1) factory equipment and facilities, (2) customers, suppliers and
business partners, (3) desktop and network hardware and software systems,
and (4) mid-range computer and manufacturing systems. Worldwide, the
Company currently employs approximately 70 employees that are addressing
the Year 2000 issue, 20 of whom are engaged in this
8
<PAGE>
effort on a full-time basis. The Company has currently budgeted $5.0
million for the cost of investigation and remediation for the period
August, 1997 to March, 2000. The budget includes staff salaries and
remediation expenses. Through September 30, 1998 the Company has spent
$1.8 million of this budget.
International Rectifier prioritized efforts to prepare its systems for
Year 2000 based on the importance of each system to the Company's
operations and the potential impact of non-compliance. The Company plans
to remediate its systems in phases, first establishing an inventory and
then assessing, correcting, testing, and certifying compliance.
Remediation efforts are underway with a milestone of May, 1999 by which
corrective action for critical items are to be completed. Non-critical
systems are scheduled to be corrected on or before November 30, 1999.
There can be no assurance, however, that serious and complicated
remediation problems will not arise during the remainder of the project.
The Company is currently surveying its suppliers and business partners,
including banks and other financial institutions with whom the Company
engages in integrated transactions, regarding whether they are Year 2000
compliant. The Company has also begun site visits to its key suppliers.
The survey and site visits are not yet complete and, accordingly, the
Company is currently unable to evaluate the extent to which such entities
may be Year 2000 compliant and the effect that their non-compliance might
have on the Company. The Company has established programs to ensure that
current and future purchases of equipment and software are Year 2000
compliant pursuant to the BSI DISC PD2000-1 definition.
The Company is developing contingency plans in the event the Company or
its significant customers, suppliers or vendors are not Year 2000
compliant by January 1, 2000. There can be no assurance that the Company
will be able to develop contingency plans that will adequately address
every issue that may arise in the year 2000. Embedded microprocessors
that regulate the basic infrastructure in various Company facilities may
fail. The software that controls manufacturing processes may fail and shut
down assembly or packaging. The computers used in business and office
operations may fail at the desktop or network level. On a broader scale,
communication and power distribution may be disrupted, financial institutions
may experience difficulties that prevent access to or the transfer of funds,
and the transportation network, water supply and food distribution may be
affected, negatively impacting employees.
Based on currently available information, management does not believe that
the Year 2000 matters discussed above will have a material adverse impact
on the Company's financial condition or results of operations. However,
because of the uncertainties in this area, no assurances can be given in
this regard. The Company is subject to external forces that might
generally affect industry and commerce, such as utility or transportation
infrastructure failures and interruptions. Supply chains and delivery
9
<PAGE>
shipments could be disrupted for an unknown period of time. In addition,
the failure by a supplier, customer or another third party to ensure Year
2000 capability could have a material adverse effect on the Company. The
costs of the project and the dates on which the Company believes it will
complete Year 2000 remediation and modifications are based on management's
best estimates, which were based on assumptions of future events,
including the continued availability of certain resources, third-party
modifications, plans, and other factors. There can be no assurance that
these estimates will be achieved, and actual results could differ
materially from those anticipated.
10
<PAGE>
7. EXECUTIVE AGREEMENT
The Company entered into an executive agreement with Eric Lidow dated May
15, 1991. The agreement set Mr. Lidow's annual salary at $500,000, granted
the Board discretion to increase his salary and to pay him bonuses, and
established a pension. Mr. Lidow's salary was increased in May 1992 to
$550,000 and in August 1994 to $632,500. Mr. Lidow was not awarded a
bonus in fiscal year 1998. The agreement may be terminated by either party
upon 90 days written notice.
Under the Agreement, prior to its amendment described below, Mr. Lidow
would have been entitled to begin receiving the pension payments when his
employment with the Company ceased for any reason (except termination for
cause). The pension would have been payable in annual installments, equal
to the sum of 90% of his then current salary and the average of his prior
three years' cash bonuses, if any. If Mr. Lidow's wife survived him, she
would have received for the remainder of her life, annual payments in an
amount equal to two-thirds of the amount of the pension payment that would
have been payable to Mr. Lidow. Before the amendments to the agreement
described below, if Mr. Lidow had retired at fiscal year end, the pension
would have been equal to $821,250 per year for the remainder of Mr.
Lidow's life and $574,500 per year for the remainder of Mrs. Lidow's life,
if she had survived him. The Company had funded a trust to cover its
liability for the pension based on actuarial assumptions established by
Coopers & Lybrand L.L.P. However, the Company's actual liability for the
pension in ensuing years could have been more or less than the funding
depending upon whether actual events mirrored the actuarial assumptions.
In 1998, the Company's Compensation Committee and Mr. Lidow renegotiated
his executive agreement by eliminating the pension provisions referred to
above. The Compensation Committee then recommended adoption of the
renegotiated agreement by the Board. In making its recommendation to the
Board, the Compensation Committee considered, among other things, its and
Mr. Lidow's desire to limit the sale of his shares of IR Common Stock to
meet commitments and its concerns about the uncertainty of the Company's
liability for the pension. In connection with the former consideration,
the Company also made certain loans to Mr. Lidow, which have since been
repaid. See "Related Party Transactions". Amendments were thereafter made
to
11
<PAGE>
the agreement that cancelled all of the Company's obligations with
respect to the pension. As consideration, the corpus of the trust of
$8,096,663 was distributed to Mr. Lidow in several installments,
$1,500,000 of which was distributed to Mr. Lidow in fiscal 1998. Based
on actuarial analysis, the consideration was less than the amount needed
to purchase the retirement benefit from a third party company. Mr. Lidow
and his wife are no longer entitled to receive any payments under the
agreement after Mr. Lidow's employment with the Company ceases.
The funding of the pension had been expensed in prior years, and the lump
sum distribution did not trigger any further expense. Because Internal
Revenue Code Section 162(m) imposes certain restrictions on the
deductibility of non-performance based compensation in excess of
$1,000,000, the Company will not be able to deduct any compensation in
excess of $1,000,000 paid to Mr. Lidow in fiscal 1998 and may not be able
to deduct any such amount in fiscal 1999.
8. RELATED PARTY TRANSACTIONS
In June 1998, after discussing with Eric Lidow his desire to limit the
sale of shares of IR Common Stock to meet commitments, the Board approved
two unsecured loans to him aggregating $1,200,000, with interest at the
annual rate of eight and one-half percent (8.5%). The loans were
disbursed in two installments of $600,000, in June and July 1998. Both
loans were due December 31, 1998, and on September 23, 1998, Mr. Lidow
repaid them with accrued interest of $23,497. Contemporaneously, the
Company amended his executive agreement. See "Executive Agreement."
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1998
COMPARED WITH THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1997
The following table sets forth certain items as a percentage of revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
(UNAUDITED)
--------------------
1998 1997
----- ------
<S> <C> <C>
Revenues 100.0% 100.0%
Cost of sales 71.6 66.2
----- -----
Gross profit 28.4 33.8
Selling and administrative expense 19.0 19.0
Research and development expense 7.9 6.6
----- -----
Operating profit 1.5 8.2
Interest expense, net (1.9) (1.2)
Other income (expense), net 0.4 (0.1)
----- -----
Income before income taxes 0.0 6.9
Provision for income taxes 0.0 2.3
----- -----
Net income 0.0% 4.6%
----- -----
----- -----
</TABLE>
Revenues for the three months ended September 30, 1998 decreased 4.2% to
$127.5 million from $133.1 million in the prior year period. Unit shipments
increased by 21 percent year-to-year, indicating strong growth in
applications for products, as well as continued gains in market share.
Revenues in the current quarter included $4.4 million of net patent
royalties, versus $4.5 million in the prior year period. September-quarter
gross margin was 28.4% of revenues ($36.2 million) compared to 33.8% of
revenues ($45.0 million) for the year-ago quarter. The year-to-year decline
in revenues and gross margin primarily reflected lower prices.
September-quarter selling and administrative expense was $24.2 million (19.0%
of revenues) versus $25.3 million (19.0% of revenues) in the comparable
year-ago quarter.
In the quarter ended September, the Company's research and development
expenditures increased to $10.0 million (7.9% of revenues) compared to $8.7
million (6.6% of revenues) in the comparable prior year period.
Net interest expense was $2.5 million compared to $1.6 million in the prior
year period, reflecting increased interest expense incurred on higher average
debt balances and a decrease in interest income.
13
<PAGE>
SEASONALITY
The Company has experienced moderate seasonality in its business in recent
years. On average over the past three years, the Company has reported
approximately 48% of annual revenues in the first half and 52% in the second
half of its fiscal year. Historical averages are not necessarily indicative
of future results.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company maintained cash and cash equivalent
balances of $31.9 million. In addition, the Company had established $60.2
million of domestic and foreign revolving lines of credit, against which
$34.2 million had been borrowed. The Company had unused capital equipment
credit lines of $63 million. However, due to covenant limitations, the total
amount the Company had available for borrowing at September 30, 1998 was
$27.8 million. At September 30, 1998, the Company had made purchase
commitments for capital equipment of approximately $6.7 million.
The Company intends to fund operations and planned capital expenditures
through cash and cash equivalents on hand, short-term investments,
anticipated cash flow from operations, and funds from existing or additional
credit facilities. However, the Company may also consider the use of funds
from other external sources including, but not limited to, public or private
offerings of debt or equity.
RECENT ACCOUNTING PRONOUNCEMENTS
On June 30, 1997, the FASB issued SFAS No.131 "Disclosures about Segments of
an Enterprise and Related Information." SFAS No.131 requires publicly-held
companies to report financial and descriptive information about its operating
segments in financial statements issued to shareholders for interim and
annual periods. The statement also requires additional disclosures with
respect to products and services, geographic areas of operation, and major
customers. SFAS 131 is effective for fiscal years beginning after December
15, 1997 and requires restatement of earlier periods presented. Management is
currently evaluating the impact, if any, of SFAS 131.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits." SFAS 132 supersedes the
disclosure requirements for SFAS No. 87 "Employers' Accounting for Pensions,"
SFAS No. 88 "Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans," and SFAS No. 106 "Employers' Accounting for
Postretirement Benefits Other than Pensions." This Statement is effective for
fiscal years beginning after December 15, 1997. Management does not believe
that this pronouncement will have a material impact on the notes to the
financial statements.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes standards for the
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities.
This Statement generally requires recognition of gains and losses on hedging
instruments, based on changes in fair value or the earnings effect of a
forecasted transaction. SFAS 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Management is currently
evaluating the impact, if any, of SFAS 133.
YEAR 2000 READINESS
The "Year 2000 Issue" is the result of many existing computer programs and
embedded microprocessors using only two digits to refer to the year. The
year 1998, for example is represented in such a two digit system as "98".
Beginning in the year 2000, these systems will need to be modified to
distinguish 21st century dates from 20th century dates. As a result,
computer systems and/or software used by many companies may need to be
adapted to meet these requirements. The disclosures contained herein are
Year 2000 statements and constitute a Year 2000 Readiness Disclosure under
Public Law No. 105-271.
The Company has adopted the definition of Year 2000 conformity published by
the British Standards Institute (BSI) as DISC PD2000-1. The adoption of this
standard as a target for compliance does not guarantee that the Company's
products or operations will be in full Year 2000 conformity as detailed in
this definition. Currently, none of the Company's products contain date
processing logic. The Company therefore represents to purchasers that its
products are Year 2000 compliant pursuant to the BSI DISC PD2000-1 definition.
The Company has established a Global Year 2000 Team as well as local site
teams. Both the Global and the local site teams consist of management as
well as operational and information technology staff members. The Global
2000 Team was formed to address company-wide Year 2000 issues, such as
overall project integration and management, project schedules, and reporting
to management. Local site teams address research and remediation for site
specific equipment, facilities and suppliers. Both the Global and local site
teams are divided into the following functional areas: (1) factory equipment
and
14
<PAGE>
facilities, (2) customers, suppliers and business partners, (3) desktop and
network hardware and software systems, and (4) mid-range computer and
manufacturing systems. Worldwide, the Company currently employs
approximately 70 employees that are addressing the Year 2000 issue, 20 of
whom are engaged in this effort on a full-time basis. The Company has
currently budgeted $5.0 million for the cost of investigation and remediation
for the period August, 1997 to March, 2000. The budget includes staff
salaries and remediation expenses. Through September 30, 1998 the Company has
spent $1.8 million of this budget.
International Rectifier prioritized efforts to prepare its systems for Year
2000 based on the importance of each system to the Company's operations and
the potential impact of non-compliance. The Company plans to remediate its
systems in phases, first establishing an inventory and then assessing,
correcting, testing, and certifying compliance.
Remediation efforts are underway with a milestone of May, 1999 by which
corrective action for critical items are to be completed. Non-critical
systems are scheduled to be corrected on or before November 30, 1999. There
can be no assurance, however, that serious and complicated remediation
problems will not arise during the remainder of the project.
The Company is currently surveying its suppliers and business partners,
including banks and other financial institutions with whom the Company
engages in integrated transactions, regarding whether they are Year 2000
compliant. The Company has also begun site visits to its key suppliers. The
survey and site visits are not yet complete and, accordingly, the Company is
currently unable to evaluate the extent to which such entities may be Year
2000 compliant and the effect that their non-compliance might have on the
Company. The Company has established programs to ensure that current and
future purchases of equipment and software are Year 2000 compliant pursuant
to the BSI DISC PD2000-1 definition.
The Company is developing contingency plans in the event the Company or its
significant customers, suppliers or vendors are not Year 2000 compliant by
January 1, 2000. There can be no assurance that the Company will be able to
develop contingency plans that will adequately address every issue that may
arise in the year 2000. Embedded microprocessors that regulate the basic
infrastructure in various Company facilities may fail. The software that
controls manufacturing processes may fail and shut down assembly or
packaging. The computers used in business and office operations may
fail at the desktop or network level. On a broader scale,
communication and power distribution may be disrupted, financial institutions
may experience difficulties that prevent access to or the transfer of funds,
and the transportation network, water supply and food distribution may be
affected, negatively impacting employees.
Based on currently available information, management does not believe that
the Year 2000 matters discussed above will have a material adverse impact on
the Company s financial condition or results of operations. However, because
of the uncertainties in this area, no assurances can be given in this regard.
The Company is subject to external forces that might generally affect
industry and commerce, such as utility or transportation infrastructure
15
<PAGE>
failures and interruptions. Supply chains and delivery shipments could be
disrupted for an unknown period of time. In addition, the failure by a
supplier, customer or another third party to ensure Year 2000 capability
could have a material adverse effect on the Company. The costs of the
project and the dates on which the Company believes it will complete Year
2000 remediation and modifications are based on management's best estimates,
which were based on assumptions of future events, including the continued
availability of certain resources, third-party modifications, plans, and
other factors. There can be no assurance that these estimates will be
achieved, and actual results could differ materially from those anticipated.
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This Form 10-Q Report contains some statements that are not historical facts
but are "forward-looking statements" as that term is defined in the Private
Securities Litigation Reform Act of 1995 and that can be identified by the
use of forward-looking terminology such as "anticipate," "believe,"
"estimate," "expect," "may," "should," "view," or "will" or the negative or
other variations thereof. Such forward-looking statements are subject to
risks and uncertainties which could cause actual results to differ materially
from those projected. Financial results are to a large extent dependent on
the power MOSFET segment of the power semiconductor industry. If market
demand does not continue to grow, revenue growth may be impacted, capacity
installed might be under-utilized, capital spending may be slowed, and
Company performance may be negatively impacted. Other risks and uncertainties
that could negatively impact Company results include: risk of nonpayment of
accounts receivable; risk of inventory obsolescence due to shifts in market
demand; an increased rate of customer inventory adjustment; deferral of
delivery dates, cancellations and returns; development and acceptance of new
products and price pressures; availability and pricing of competitors'
products; lower manufacturing yields; risks associated with foreign
operations and foreign currency fluctuations; adverse results in litigation
involving intellectual property; environmental claims; shareholder lawsuits;
the successful implementation of the Company's announced restructuring
program; the availability of cost effective sources of financing; and
business and general economic conditions in the Company's markets around the
world.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL RECTIFIER CORPORATION
-----------------------------------
Registrant
November 18, 1998 MICHAEL P. MCGEE
----------------------------
Michael P. McGee
Vice President,
Chief Financial Officer and
Principal Accounting Officer
17
<PAGE>
PART II. OTHER INFORMATION
None
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-04-1999
<PERIOD-START> JUL-06-1998
<PERIOD-END> OCT-04-1998
<CASH> 31,876
<SECURITIES> 0
<RECEIVABLES> 123,763
<ALLOWANCES> (1,579)
<INVENTORY> 129,058
<CURRENT-ASSETS> 294,644
<PP&E> 632,170
<DEPRECIATION> (271,609)
<TOTAL-ASSETS> 727,614
<CURRENT-LIABILITIES> 136,621
<BONDS> 0
0
0
<COMMON> 51,528
<OTHER-SE> 351,359
<TOTAL-LIABILITY-AND-EQUITY> 727,614
<SALES> 127,493
<TOTAL-REVENUES> 127,493
<CGS> 91,283
<TOTAL-COSTS> 91,283
<OTHER-EXPENSES> 34,228
<LOSS-PROVISION> 87
<INTEREST-EXPENSE> 2,451
<INCOME-PRETAX> 49
<INCOME-TAX> 15
<INCOME-CONTINUING> 34
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
