<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, 1999
------------------
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 (IRS employer identification
of 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 52,013,271 shares of the registrant's common stock, par value
$1.00 per share, outstanding on November 12, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page
Reference
---------
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Unaudited Consolidated Statement of
Income for the Three-Month Periods
Ended September 30, 1999 and 1998 3
Unaudited Consolidated Statement of
Comprehensive Income for the Three-Month
Periods Ended September 30, 1999 and 1998 4
Consolidated Balance Sheet as of
September 30, 1999 (unaudited) and
June 30, 1999 5
Unaudited Consolidated Statement of
Cash Flows for the Three-Month
Periods Ended September 30, 1999
and 1998 6
Notes to Unaudited Consolidated
Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 16
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES
ON MARKET RISK 24
PART II. OTHER INFORMATION
None
</TABLE>
2
<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
1999 (restated)
----------- -----------
<S> <C> <C>
Revenues $152,239 $127,493
Cost of sales 104,020 91,283
-------- --------
Gross profit 48,219 36,210
Selling and administrative expense 26,656 24,207
Research and development expense 10,596 10,021
-------- --------
Operating profit 10,967 1,982
Other income (expense):
Interest, net (3,425) (2,451)
Other, net - 518
-------- --------
Income before income taxes and cumulative
effect of accounting change 7,542 49
Provision for income taxes 2,413 15
-------- --------
Income before cumulative effect of accounting
change 5,129 34
Cumulative effect of change in accounting
principle, net of income tax benefit
of $5,431 - (26,154)
-------- --------
Net income (loss) $ 5,129 $(26,120)
======== ========
Net income (loss) per common share - Basic
and Diluted:
Income (loss) before cumulative effect of
change in accounting principle $ 0.10 $ 0.00
Cumulative effect of change in accounting
principle - (0.50)
-------- --------
Net income (loss) per common share $ 0.10 $ (0.50)
======== ========
Average common shares outstanding - Basic 51,928 51,514
======== ========
Average common shares and potentially dilutive
securities outstanding - Diluted 53,096 51,519
======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------------
1998
1999 (restated)
----------- -----------
<S> <C> <C>
Net income (loss) $ 5,129 $(26,120)
Other comprehensive income:
Foreign currency translation adjustments 1,698 2,030
-------- --------
Comprehensive income (loss) $ 6,827 $(24,090)
======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
September 30,
1999 June 30,
(unaudited) 1999
------------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 27,561 $ 31,497
Short-term investments 3,000 8,900
Trade accounts receivable, net 131,189 121,659
Inventories 110,143 108,463
Deferred income taxes 15,573 16,078
Prepaid expenses and other receivables 15,254 19,677
-------- --------
Total current assets 302,720 306,274
Property, plant and equipment, net 385,328 380,504
Other assets 23,467 22,307
-------- --------
Total assets $711,515 $709,085
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank loans $ 12,244 $ 14,996
Long-term debt, due within one year 8,027 8,047
Accounts payable 65,096 64,809
Accrued salaries, wages and commissions 20,195 19,546
Other accrued expenses 30,337 33,234
-------- --------
Total current liabilities 135,899 140,632
Long-term debt, less current maturities 156,002 158,418
Other long-term liabilities 7,094 7,142
Deferred income taxes 6,114 6,619
Stockholders' equity:
Common stock 53,581 51,781
Capital contributed in excess of par value 259,252 257,746
Retained earnings 97,996 92,868
Accumulated other comprehensive income (4,423) (6,121)
-------- --------
Total stockholders' equity 406,406 396,274
-------- --------
Total liabilities and stockholders' equity $711,515 $709,085
======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
5
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------
1998
1999 (restated)
---------- -----------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $ 5,129 $(26,120)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 13,147 11,426
Deferred income (150) (150)
Deferred income taxes (6) 656
Deferred compensation 4 (6,241)
Cumulative effect of change in accounting principle - 26,154
Change in working capital (4,488) 5,999
-------- --------
Net cash provided by operating activities 13,636 11,724
-------- --------
Cash flow from investing activities:
Additions to property, plant and equipment (16,271) (27,776)
Purchase of short-term investments (3,000) -
Proceeds from sale of short-term investments 8,900 13,232
Change in other noncurrent assets (1,085) 4,561
-------- --------
Net cash used in investing activities (11,456) (9,983)
-------- --------
Cash flow from financing activities:
Net repayments of short-term bank debt (3,400) (24,263)
Proceeds from issuance of (repayments of)
long-term debt (122) 38,047
Payments on long-term debt and obligations
under capital leases (2,549) (19,270)
Net proceeds from issuance of common stock 3,287 1,160
Other (3,810) 1,949
-------- --------
Net cash used in financing activities (6,594) (2,377)
-------- --------
Effect of exchange rate changes on cash and
cash equivalents 478 218
-------- --------
Net decrease in cash and cash equivalents (3,936) (418)
Cash and cash equivalents, beginning of period 31,497 32,294
-------- --------
Cash and cash equivalents, end of period $ 27,561 $ 31,876
======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
6
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
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, 1999 and the
consolidated results of operations and cash flows for the three-month
periods ended September 30, 1999 and 1998. 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, 1999 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, 1999.
The Company operates on a fiscal year calendar under which the three
months ended September 30, 1999 and 1998 consisted of 13 weeks.
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, 1999 and 1998 (in thousands except per
share amounts):
7
<PAGE>
<TABLE>
<CAPTION>
Net Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Three Months ended September 30, 1999
Net income per common share - Basic....... $ 5,129 51,928 $ 0.10
Effect of dilutive securities:
Stock options........................... - 1,168 -
--------------------------------------
Net income per common share - Diluted..... $ 5,129 53,096 $ 0.10
======================================
<CAPTION>
Net Loss Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Three Months ended September 30, 1998
(Restated)
Net loss per common share - Basic......... $(26,120) 51,514 $ (0.50)
Effect of dilutive securities:
Stock options........................... - 5 -
--------------------------------------
Net loss per common share - Diluted....... $(26,120) 51,519 $ (0.50)
======================================
</TABLE>
3. INVENTORIES
Inventories are stated at the lower of cost (principally first-in,
first-out) or market. Inventories at September 30, 1999 and June 30,
1999 were comprised of the following (in thousands):
<TABLE>
<CAPTION>
September 30, 1999 June 30, 1999
------------------ -------------
<S> <C> <C>
Raw materials $ 15,444 $ 15,277
Work-in-process 52,749 52,124
Finished goods 41,950 41,062
-------- --------
$110,143 $108,463
======== ========
</TABLE>
4. LONG-TERM DEBT AND OTHER LOANS
A summary of the Company's long-term debt and other loans at September
30, 1999 is as follows (in thousands):
8
<PAGE>
<TABLE>
<CAPTION>
September 30,
1999
-------------
<S> <C>
Domestic bank loans collateralized by the majority
of the Company's assets, payable in quarterly installments of
principal and interest at variable rates of 8.3% and 8.8%,
due in 2004 and 2005 $ 153,634
Capitalized lease obligations payable in varying monthly
installments primarily at rates from 6.3% to 8.5% 5,140
Foreign bank loans collateralized by property and/or
equipment, payable in varying monthly installments at 10.8%,
due in 2000 113
Foreign unsecured bank loans payable in varying monthly
installments at rates from 4.3% to 8.4%, due in 2000
through 2006 5,142
----------
Debt, including current portion of long-term debt of $8,027 164,029
Foreign unsecured revolving bank loans at rates from
1.5% to 8.5% 12,244
----------
Total Debt $ 176,273
==========
</TABLE>
In June 1999, the Company entered into a syndicated Credit Agreement
with Banque Nationale de Paris. The financing consisted of two term
loans totaling $155 million due in 2004 and 2005 and a $70 million
revolving line of credit. The proceeds from the term loans were used to
pay down all of the Company's existing long-term unsecured bank loans
and substantially all domestic bank loans. As of September 30, 1999,
$153.6 million was outstanding against these two term loans, and no
borrowings have occurred against the $70 million revolving line of
credit. The interest rate on these two term loans is based on a rate of
3.0% to 3.5% above the applicable LIBOR rate. The loans are
collateralized by the majority of the Company's assets. The Credit
Agreement imposes some restrictions, including the following: (a)
maximum leverage, minimum interest coverage and fixed charge coverage
ratios (b) minimum EBITDA (Earnings Before Interest, Taxes,
Depreciation and Amortization) (c) maximum capital expenditures and
(d) a limitation on losses. The Credit Agreement also restricts the
Company with respect to the payment of cash dividends, the sale of
assets, mergers and acquisitions, additional financing, and investments.
5. RESTRUCTURING AND SEVERANCE CHARGES
During the second quarter of fiscal 1999, the Company recorded a $14.5
million restructuring charge associated with plans to relocate
high-volume assembly lines from its facility in England to its facility
in Mexico to take advantage of labor rate savings, to centralize more of
its European customer service and administrative activities, and to
reduce personnel. The Company expects to complete this operational
transition over the nine months ending on June 30, 2000. The charge
consisted of $5.9 million for estimated severance costs associated with
the elimination of
9
<PAGE>
approximately 350 positions, primarily operators and technicians;
$6.1 million for the write-off of assets to be abandoned; and $2.5
million for the write-down of inventory related to specialty product
lines. None of the assets written down (primarily building
improvements relating to the high-volume assembly production lines and
production information systems) will remain in use, and all will be
abandoned after the production lines are relocated. In the third
quarter of fiscal 1999, the Company recorded a charge of $4.2 million
relating to additional severance costs, after appropriate notification
was given to 43 remaining affected employees in the sales, customer
service and administrative areas. The severance per person was larger
for the third-quarter fiscal 1999 restructuring versus the
second-quarter fiscal 1999 restructuring as the 43 positions included in
the third-quarter fiscal 1999 restructuring are primarily highly paid
employees in sales and administrative management. The 350 positions in
the second-quarter fiscal 1999 restructuring were primarily operators
and technicians who on average have a much lower salary level. The
Company estimates that, ultimately, charges associated with all of these
actions will total approximately $18.7 million.
As of September 30, 1999, the Company had eliminated 32 positions, paid
$3.4 million for termination benefits related to this program and
recorded the asset impairment of $8.6 million. The remaining unutilized
restructuring accrual of $6.7 million, which is classified as current,
relates to severance payments to be made to these previously notified
employees for positions that are scheduled to be eliminated during the
next nine months.
During the fourth quarter of fiscal 1999, the Company recorded an $8.3
million charge related to employee severance associated with the
elimination of approximately 39 positions. This includes a reduction in
sales and administrative management staff levels and the resignation of
Dr. Derek B. Lidow who shared the responsibility of Chief Executive
Officer. As of September 30, 1999, the Company had eliminated 23
positions and paid $4.0 million in termination benefits. The remaining
unutilized severance accrual of $4.3 million at September 30, 1999,
which is classified as current, relates to severance payments to these
previously notified employees for positions that are scheduled to be
eliminated during the next nine months.
6. GEOGRAPHICAL INFORMATION
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 131 in fiscal 1999. The Company operates in one business segment.
Revenues from unaffiliated customers are based on the location in which
the sale originated. Geographic information for 1999 and 1998 is
presented below (000's):
10
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
---- ----
<S> <C> <C>
Revenues from Unaffiliated Customers
England....................................... $ 17,455 $ 20,305
Singapore..................................... 26,582 18,586
Other Foreign................................. 41,476 26,397
-----------------------
Subtotal - Foreign.......................... 85,513 65,288
United States................................. 59,314 57,767
Unallocated royalties......................... 7,412 4,438
-----------------------
Total....................................... $152,239 $127,493
=======================
<CAPTION>
September 30, June 30,
1999 1999
---- ----
<S> <C> <C>
Identifiable Assets
England....................................... $ 88,831 $103,002
Singapore..................................... 63,482 62,625
Other Foreign................................. 55,484 32,549
-----------------------
Subtotal - Foreign.......................... 207,797 198,176
United States................................. 467,700 482,636
Corporate assets.............................. 36,018 28,273
-----------------------
Total....................................... $711,515 $709,085
=======================
</TABLE>
Corporate assets consist of cash, short-term investments, royalties
receivable, inventory reserves, deferred taxes and certain other
assets.
One customer accounted for 11.1% of the Company's consolidated
net revenues in the quarter ended September 30, 1999. No single customer
accounted for more than 10% of the Company's consolidated net revenues
in the quarter ended September 30, 1998.
7. ENVIRONMENTAL MATTERS
Federal, state, and local laws and regulations impose various
restrictions and controls on the storage, use and discharge of certain
materials, chemicals, and gases used in semiconductor manufacturing
processes. The Company does not believe that compliance with such laws
and regulations as now in effect will have a material adverse effect on
the Company's results of operations, financial position or cash flows.
However, under some of these laws and regulations, the Company could be
held financially responsible for remedial measures if properties are
contaminated, or if waste is sent to a landfill or recycling facility
that becomes contaminated. Also, the Company may be subject to common
law claims if it releases substances that damage or harm third
11
<PAGE>
parties. The Company cannot make assurances that changes in
environmental laws and regulations will not require additional
investments in capital equipment and the implementation of additional
compliance programs in the future which could have a material adverse
effect on the Company's results of operations, financial position or
cash flows, as could any failure by the Company to comply with
environmental laws and regulations.
The Company and Rachelle Laboratories, Inc. ("Rachelle"), a former
operating subsidiary of the Company that discontinued operations in
1986, were each named a potentially responsible party ("PRP") in
connection with the investigation by the United States Environmental
Protection Agency ("EPA") of the disposal of allegedly hazardous
substances at a major superfund site in Monterey Park, California ("OII
Site"). Certain PRPs who settled certain claims with the EPA under
consent decrees filed suit in Federal Court in May 1992 against a number
of other PRPs, including the Company, for cost recovery and contribution
under the provisions of the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"). The Company has settled all
outstanding claims that have arisen out of the OII Site. No claims
against Rachelle have been settled.
The Company received a letter dated July 25, 1995 from the U.S.
Department of Justice, directed to Rachelle, offering to settle claims
against Rachelle relating to the first elements of clean-up work at the
OII Site for $4,953,148 (the final remedy assessment has not yet been
made). The offer stated that the settlement would not cover the cost of
any additional remedial actions required to finish the clean-up. This
settlement offer expired by its terms on September 1, 1995. On August 7,
1995, the Company received a Supplemental Information Request from the
EPA directed to Rachelle, to which counsel for Rachelle responded with
information regarding waste shipped to the OII Site. Counsel for Rachelle
received a letter from the EPA dated September 30, 1997, requesting that
Rachelle participate in the final remedial actions at the site, and
counsel replied on October 21, 1997. The Company has taken the position
that none of the wastes generated by Rachelle were hazardous. Neither
the Company nor Rachelle, nor counsel for either of them, have received any
further communication in connection with Rachelle's involvement with the
OII Site.
The Company cannot determine with accuracy the amount of the potential
demand to Rachelle for the cost of the final remedy. Based upon
information received to date, the Company believes that any demand, if
made, while likely to be significant, should nonetheless be substantially
below, although in addition to, the demand amount for earlier phases of
the OII Site clean-up. The Company's insurer has not accepted liability
although it has made payments for defense costs for the lawsuit against
the Company.
The Company received a letter dated September 9, 1994, from the State of
California Department of Toxic Substances Control stating that it may be
a PRP for the deposit of hazardous substances at a facility in Whittier,
California. In June 1995, the Company joined a group of other PRPs to
remove contamination from the site. The group currently estimates the
total cost of the clean-up to be between $20 million and $25 million,
although the actual cost could be much higher. The Company estimated that
it sent approximately 0.1% of the waste, by weight, sent by all PRPs
contributing to the clean-up of the site, and the Company believes the
cost of the clean-up will be roughly allocated
12
<PAGE>
among PRPs by the amount of waste contributed. On July 31, 1999, the
group proposed two settlement offers to the Company: one for $34,165 and
the second for $68,330. The first settlement offer covers investigation
and remediation of the site itself and a small area extending beyond the
site. The second settlement offer covers this area plus all additional
downgradient contamination. The Company accepted the $68,330 settlement
offer, which requires EPA acceptance, on September 14, 1999 and made
the required payment on September 28, 1999. There can be no assurance,
however, that the EPA will accept the settlement offers or what the
ultimate outcome of this matter will be. The Company believes that,
whatever the outcome, it will not have a material adverse effect on the
Company's financial condition, results of operations or cash flows.
8. INTELLECTUAL PROPERTY RIGHTS
Most of the Company's broadest power MOSFET patents were subject to, and
have successfully emerged from, reexamination by the United States Patent
and Trademark Office ("PTO"). The Company's 5,008,725 and 5,130,767
patents are currently undergoing reexamination in the PTO.
9. LITIGATION
The Company, along with 87 other companies, was sued in Phoenix, Arizona
federal court on February 26, 1999, by the Lemelson Foundation for alleged
infringement of various Lemelson "machine-vision" and "auto ID" patents.
In July 1999, the Company entered into an agreement with the Lemelson
Foundation that settled all outstanding claims and grants the Company a
license to use the Lemelson patents asserted against the Company.
The Company and certain of its directors and officers have been named as
defendants in three class action lawsuits filed in Federal District Court
for the Central District of California in 1991. These suits seek
unspecified but substantial compensatory and punitive damages for alleged
intentional and negligent misrepresentations and violations of the federal
securities laws in connection with the public offering of the Company's
common stock completed in April 1991 and the redemption and conversion in
June 1991 of the Company's 9% Convertible Subordinated Debentures due
2010. They also allege that the Company's projections for growth in fiscal
1992 were materially misleading. Two of these suits also named the
Company's underwriters, Kidder, Peabody & Co. Incorporated and Montgomery
Securities, as defendants.
On March 31, 1997, the Court, on the Company and the individual defendants'
motion for summary judgment, issued the following orders: (a) the motion
for summary judgment was granted as to claims brought under Sections 11
and 12(2) of the Securities Act of 1933; (b) the motion was denied as to
claims brought under Section 10(b) of the Securities Exchange Act of 1934
and the Securities and Exchange Commission Rule 10b-5; and (c) the motion
was granted as to the common law claims for fraud and negligent
misrepresentation to the extent said claims are based on representations
contained in the
13
<PAGE>
offering prospectus and was denied as to other such claims. The Court
also granted the summary judgment motion brought by the underwriters.
The plaintiffs' motion for reconsideration or certification of an
interlocutory appeal of these orders was denied.
On January 28, 1998, the Court decertified the class pursuing common law
claims for fraud and negligent misrepresentation and granted the
defendants' motion to narrow the shareholder class period to June 19, 1991
through October 21, 1991. Plaintiffs' motion for reconsideration or
certification of an interlocutory appeal of these rulings was denied.
On June 14, 1999, the Court approved a notice of the pendency of the class
action and a proof of claim form for dissemination to class members. Such
dissemination took place in June 1999. Trial is scheduled for March 14,
2000.
Although the Company believes that the remaining claims alleged in the
suits are without merit, the ultimate outcome cannot be presently
determined. A substantial judgment or settlement, if any, could have a
material adverse effect on the Company's results of operations, financial
position or cash flows. No provision for any liability that may result
upon adjudication of these matters has been made in the Consolidated
Financial Statements.
10. RELATED PARTIES
In May 1999, after considering the recommendation of the Chairman and
Chief Executive Officers, the Board determined that the Company should
implement a single CEO management structure. To effectuate this management
change, the Company entered into an agreement with Dr. Derek B. Lidow on
May 10, 1999 ("Agreement"), which provided for Dr. Lidow's resignation
as Chief Executive Officer and as an employee of the Company. Under the
terms of the Agreement, Dr. Lidow received a severance payment of
$3,200,000 on June 15, 1999, a bonus of $100,000 for fiscal 1999
performance on August 13, 1999 and a grant of 200,000 stock options on
June 14, 1999, which were fully vested, and which expire on June 13,
2009. The Agreement also provided for the immediate acceleration of the
vesting of all of Dr. Lidow's outstanding unvested stock options and
extended the period during which the options could be exercised. Under the
Agreement, Dr. Lidow will provide consulting services to the Company for a
period of two years for which he will be compensated $100,000 per quarter
plus associated expenses.
In connection with Dr. Derek B. Lidow's exercise of an option on June 23,
1999 to purchase 64,000 shares of IR Common Stock, the Company had an
outstanding receivable from Dr. Lidow for $597,694 at June 30, 1999, which
was paid off on July 7, 1999.
14
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11. RESTATEMENT
In fiscal 1999, the Company reported a non-cash, after-tax charge of
$26.2 million associated with the early adoption of Statement of Position
("SOP") 98-5, a mandated change in accounting practices for certain
start-up and preoperating costs. This cumulative effect of accounting
change was recorded retroactively to the first quarter of 1999 as a one-
time charge. Such costs had previously been deferred and amortized by the
Company. Therefore, the three months ending September 30, 1998 have been
restated to reflect the above charge.
15
<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, 1999
COMPARED WITH THE THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1998
The following table sets forth certain items as a percentage of revenues.
Three Months Ended
September 30,
(Unaudited)
------------------
1998
1999 (restated)
------------------
Revenues 100.0% 100.0%
Cost of sales 68.3 71.6
------ ------
Gross profit 31.7 28.4
Selling and administrative expense 17.5 19.0
Research and development expense 7.0 7.9
------ ------
Operating profit 7.2 1.5
Interest expense, net (2.2) (1.9)
Other income, net 0.0 0.4
------ ------
Income before income taxes and
effect of accounting change 5.0 0.0
Provision for income taxes 1.6 0.0
------ ------
Income before cumulative effect of
accounting change 3.4 0.0
Cumulative effect of change in accounting
principle 0.0 (20.5)
------ ------
Net income (loss) 3.4% (20.5)%
====== ======
Revenues for the three months ended September 30, 1999 increased 19.4% to
$152.2 million from $127.5 million in the prior-year period. This
September-quarter revenue increase reflected strong telecom and PC demand, and
relatively stable pricing. Revenues in the current quarter included
$7.4 million of net patent royalties, versus $4.4 million in the prior-year
period, reflecting a number of new license agreements and market growth.
Product sales by region (based on the location of the customer) for the three
months ended September 30, 1999 were approximately 37% from North America, 25%
from Europe and 39% from Asia, which includes Japan and Asia Pacific, compared
to 42%, 26% and 32%, respectively, in the prior-year period. Revenue in Asia
increased 41% over the prior-year period as a result of increased activity in
the computer-related segments and some U.S.-based customers moving operations
to Asia. Europe revenue was up 11% over the prior-year period due to increased
activity in most market segments. Revenue in North America increased 4% over
the prior-year period, despite the impact of the movement of certain customers
from the U.S. to Asia.
16
<PAGE>
September-quarter orders rose by 42% year-to-year due to sell-through of IR
product in the distribution channel. In addition, IR's unit shipments have
increased by 45% year-to-year. The Company anticipates increasing levels of
unit shipments from new products into digital cell phones, systems using
Intel's Pentium III and AMD's Athlon microprocessors, and power supplies for
routers and servers.
September-quarter gross margin was 31.7% of revenues ($48.2 million) compared
to 28.4% of revenues ($36.2 million) for the year-ago quarter. Despite slightly
lower prices, the gross margin increase reflected a higher proportion of
revenue from new and proprietary products and lower manufacturing costs.
September-quarter selling and administrative expense was $26.7 million (17.5%
of revenues) versus $24.2 million (19.0% of revenues) in the comparable
year-ago quarter. This reflects initiatives to increase the productivity of
selling and administrative activities as well as the benefit of restructuring
programs.
In the quarter ended September, the Company's research and development
expenditures increased to $10.6 million (7.0% of revenues) compared to
$10.0 million (7.9% of revenues) in the comparable prior-year period. The
Company anticipates maintaining this level of research and development
expenditures in order to accelerate the development of new products.
With respect to current-quarter activity related to restructuring and
severance charges taken in prior periods, refer to Note 5 of the Notes to
Unaudited Consolidated Financial Statements.
Net interest expense was $3.4 million compared to $2.5 million in the
prior-year period, reflecting increased interest expense primarily as a result
of higher average interest rates on domestic debt from a new credit agreement
entered into at the end of the fourth quarter of fiscal 1999.
Net foreign currency gains and losses were less than $1 million in each
three-month period.
In fiscal 1999, the Company reported a non-cash, after-tax charge of
$26.2 million associated with the early adoption of Statement of Position
("SOP") 98-5, a mandated change in accounting practices for certain start-up
and preoperating costs. This cumulative effect of accounting change was
recorded retroactively to the first quarter of fiscal 1999 as a one-time
charge. Such costs had previously been deferred and amortized by the Company.
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.
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had cash and cash equivalent balances and
short-term investments of $27.6 million and $3.0 million, respectively. During
the three-month period ended September 30, 1999, operating activities increased
cash flow by $13.6 million.
Net investing activities consumed $11.5 million, primarily due to capital
expenditures of $16.3 million. This was partially offset by short-term
investment activities. At September 30, 1999, the Company had made purchase
commitments for capital expenditures of approximately $13.8 million. Assuming
existing market conditions, the Company plans fiscal 2000 capital investments
of approximately $60 million, principally for fabrication and assembly capacity
to meet market demand. The Company intends to fund capital expenditures and
working capital requirements through cash and cash equivalents on hand,
anticipated cash flow from operations, and, as needed, from funds available
from a revolving credit facility. Although the Company believes that funding
will be sufficient, it may also consider other external sources including, but
not limited to, public or private offerings of debt or equity or equipment
leasing.
Cash used in financing activities consumed $6.6 million. In June 1999, the
Company entered into a syndicated Credit Agreement with Banque Nationale de
Paris. The financing consisted of two term loans totaling $155 million due in
2004 and 2005 and a $70 million revolving line of credit. The proceeds from
the term loans were used to pay down all of the Company's existing long-term
unsecured bank loans and substantially all domestic bank loans. As of
September 30, 1999, $153.6 million was outstanding against these two term
loans, and no borrowings have occurred against the $70 million revolving line
of credit. The interest rate on these two term loans is based on a rate of 3.0%
to 3.5% above the applicable LIBOR rate. The loans are collateralized by the
majority of the Company's assets. The Credit Agreement imposes some
restrictions, including the following: (a) maximum leverage, minimum interest
coverage and fixed charge coverage ratios, (b) minimum EBITDA (Earnings Before
Interest, Taxes, Depreciation and Amortization), (c) maximum capital
expenditures and, (d) a limitation on losses. The Credit Agreement also
restricts the Company with respect to the payment of cash dividends, the sale
of assets, mergers and acquisitions, additional financing, and investments.
The Company also had $21.8 million in foreign revolving lines of credit,
against which $12.2 million had been borrowed. Foreign term loan facilities of
$5.3 million and equipment financing facilities of $5.1 million were both fully
utilized. As of September 30, 1999, the Company had $255.8 million under its
credit facilities, against which $176.3 million had been borrowed.
Based on cash and cash equivalents on hand, short-term investments and its
credit facilities, at September 30, 1999, the Company's liquidity was $110.1
million.
Three class action lawsuits have been brought against the Company and its
Board of Directors. See Note 9. Litigation for further information. Although
the Company believes that these class action lawsuits are without merit, the
ultimate outcome and the related effect on liquidity thereof cannot be
presently determined. Accordingly, the Company has not made any provision for
any liability, if any, that may result upon adjudication of these matters. For
the possible effects of environmental matters on liquidity, see Note 7.
Environmental Matters.
18
<PAGE>
IMPACT OF THE INTRODUCTION OF THE EURODOLLAR
On January 1, 1999, eleven member states of the European Union established
fixed conversion rates between their existing national currency and a common
currency, the "euro." Until January 1, 2002, either the euro or the
participating country's present currency will be accepted as legal currency. On
January 1, 2002, euro-denominated bills and coins will be issued and the
participating country's present currency will no longer be accepted as legal
tender and will be withdrawn from circulation.
The Company has initiated an internal analysis to determine the effects of the
January 1, 2002 conversion. The current assessment includes the potential
impact of the technical challenges to adapt information technology and other
systems to accommodate euro-denominated transactions, the impact on currency
exchange rate risk and currency exchange costs, and the impact on existing
contracts.
Based on currently available information, management does not believe that the
euro conversion will have a material adverse impact on the Company's business
or financial condition. The Company will continue to evaluate the impact of the
euro conversion.
RESTRUCTURING AND SEVERANCE CHARGES
During the second quarter of fiscal 1999, the Company recorded a $14.5
million restructuring charge associated with plans to relocate high-volume
assembly lines from its facility in England to its facility in Mexico to take
advantage of labor rate savings, to centralize more of its European customer
service and administrative activities, and to reduce personnel. The Company
expects to complete this operational transition over the nine months ending
on June 30, 2000. The charge consisted of $5.9 million for estimated
severance costs associated with the elimination of approximately 350
positions, primarily operators and technicians; $6.1 million for the
write-off of assets to be abandoned; and $2.5 million for the write-down of
inventory related to specialty product lines. None of the assets written
down (primarily building improvements relating to the high-volume assembly
production lines and production information systems) will remain in use, and
all will be abandoned after the production lines are relocated. In the third
quarter of fiscal 1999, the Company recorded a charge of $4.2 million
relating to additional severance costs, after appropriate notification was
given to 43 remaining affected employees in the sales, customer service and
administrative areas. The severance per person was larger for the
third-quarter fiscal 1999 restructuring versus the second-quarter fiscal 1999
restructuring as the 43 positions included in the third-quarter fiscal 1999
restructuring are primarily highly paid employees in sales and administrative
management. The 350 positions in the second-quarter fiscal 1999 restructuring
were primarily operators and technicians who on average have a much lower
salary level. The Company estimates that, ultimately, charges associated
with all of these actions will total approximately $18.7 million.
The anticipated cost savings from the second and third fiscal 1999 quarter
restructuring activities are expected to save the Company approximately $5
million in
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<PAGE>
fiscal 2000 and $13 million annually thereafter. The estimated savings
consist of lower direct labor cost, lower factory overhead (including lower
depreciation expense), lower materials costs and lower selling and
administrative costs.
As of September 30, 1999, the Company had eliminated 32 positions, paid $3.4
million for termination benefits related to this program and recorded the
asset impairment of $8.6 million. The remaining unutilized restructuring
accrual of $6.7 million, which is classified as current, relates to severance
payments to be made to these previously notified employees for positions that
are scheduled to be eliminated during the next nine months.
During the fourth quarter of fiscal 1999, the Company recorded an $8.3
million charge related to employee severance associated with the elimination
of approximately 39 positions. This includes a reduction in sales and
administrative management staff levels and the resignation of Dr. Derek B.
Lidow who shared the responsibility of Chief Executive Officer. As of
September 30, 1999, the Company had eliminated 23 positions and paid $4.0
million in termination benefits. The remaining unutilized severance accrual
of $4.3 million at September 30, 1999, which is classified as current,
relates to severance payments to these previously notified employees for
positions that are scheduled to be eliminated during the next nine months.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective the first day of fiscal 2000, the Company adopted SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 provides guidance on accounting for the costs of
computer software developed or obtained for internal use. The new guidance
does not significantly differ from the Company's previous accounting
treatment for software developed or obtained for internal use, and as a
result, did not have a significant impact on the Consolidated Financial
Statements.
During fiscal 1999, the Company elected early adoption of SOP 98-5,
"Reporting on the Costs of Start-Up Activities." This new accounting
standard, issued in April 1998 by the American Institute of Certified Public
Accountants, requires most entities to expense all start-up and preoperating
costs as they are incurred. The Company previously deferred such costs and
amortized them over the life of the related asset following the start-up of
each new process. The fiscal 1999 adoption of SOP 98-5 was required to be
made retroactive to the first quarter. The cumulative effect of this change
in accounting principle, net of income tax benefit of $5.4 million, was $26.2
million or $0.50 per basic and diluted share and was recorded retroactively
to the first quarter of fiscal 1999 as a one-time charge. Currently, all
start-up and preoperating costs are expensed as incurred.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities," which was later amended by SFAS No. 137
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133." 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,
20
<PAGE>
based on changes in fair value or the earnings effect of a forecasted
transaction. SFAS No. 133, as amended by SFAS No. 137, is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. Management
does not believe that SFAS No. 133 or SFAS No. 137 will have a material
impact on the Consolidated Financial Statements.
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.
Beginning in the year 2000, these systems will need to be upgraded or
replaced to distinguish 21st century dates from 20th century dates.
The Company has adopted the definition of Year 2000 conformity published by
the British Standards Institute ("BSI") as DISC PD2000-1. Currently, none of
the Company's products contain date processing logic. The Company,
therefore, believes that its products are Year 2000 compliant pursuant to the
BSI DISC PD2000-1 definition.
The Company's Global Year 2000 Team was formed to manage and coordinate
company-wide Year 2000 initiatives, while local site teams address research
and remediation for site-specific equipment, facilities and suppliers.
Worldwide, the Company currently employs approximately 50 employees that are
addressing the Year 2000 issue, 15 of whom are engaged in this effort on a
full-time basis. The Company is currently estimating $7.7 million for the
cost of investigation and remediation for the period August 1997 to March
2000. The estimate includes staff salaries and remediation expenses. Through
September 30, 1999, the Company has expensed $6.6 million of this estimate.
The Company prioritized efforts to prepare its information 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 is remediating its
information systems in phases, by first establishing an inventory of its
information systems and then assessing, correcting, testing, and certifying
them for compliance. As of May 31, 1999 and in accordance with the Company's
project plan, corrective actions were deployed for all mission critical
items. Having achieved the May 31st milestone for mission critical items, the
Company's project remains on schedule and the Company expects to document its
remediation efforts for non-critical items on or before November 30, 1999.
Furthermore, 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 continuing to certify one system as Year 2000 ready pursuant
to the BSI DISC PD2000-1 definition. This system has been tested internally,
certification efforts are on-going and contingency plans are being developed,
and, if necessary, this system will be upgraded during a local plant shutdown
for routine maintenance purposes in late December 1999 or early January 2000.
Management does not believe that certification of this system, or the use of
contingency plans if certification is not achieved, will have a material
adverse impact on the Company's financial condition, liquidity or results of
operations.
21
<PAGE>
As of May 31, 1999, the Company completed all remediation activity to
determine Year 2000 readiness status for mission critical suppliers and
business partners, including financial institutions with whom the Company has
material relationships. Furthermore, the Company has in place contingency
plans for mission critical suppliers or business partners that were not able
to indicate their Year 2000 compliance or readiness. These contingency plans
include the identification of possible alternate suppliers, possible
alternate modes of transportation, and the identification of possible sources
for an increase in raw material inventory. The remediation efforts and
contingency plans for substantially all non-critical suppliers and business
partners are expected to be documented on or before November 30, 1999.
Worldwide project auditing and Year 2000 certification is ongoing and to date
indicates that the Company is positioned to complete the project on schedule.
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, liquidity, or results of operations.
Currently, infrastructure service providers (e.g. utilities and
transportation) are the areas of greatest concern. To date, interviews and
surveys of the Company's power, water and transportation suppliers indicate
that the most reasonably likely worst case scenarios would be a temporary
disruption in utilities service, supplier delivery and/or shipments to
customers. The Company is continuing to develop contingency plans to mitigate
such disruptions in the event the Company or its material customers,
suppliers or vendors are not Year 2000 compliant by January 1, 2000. IR
should have substantially all of these contingency plans in place on or
before November 30, 1999.
There can be no assurance that the Company's compliance efforts and
contingency plans 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 fabrication, 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
as well as industry and commerce generally. In addition, International
Rectifier has some facilities, customers and suppliers that are located in
developing or formerly Eastern Bloc nations that have been identified by the
United States Department of State as having a medium to high risk of failures
in telecommunications, energy and/or transportation resulting from the Year
2000 problem. The costs of the Company's Year 2000 remediation and the dates
on which the Company believes that it will be completed are based on the
Company's best estimates, which were based on assumptions of future events,
including the continued availability of certain resources, third-party
compliance and other factors. There can be no assurance that these estimates
will be achieved, and actual results could differ materially from those
anticipated.
The disclosures contained herein are Year 2000 statements and constitute a
Year 2000 Readiness Disclosure under Public Law No. 105-271.
22
<PAGE>
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. These statements 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,
manufacturing capacity might be under-utilized, capital spending might be
slowed, and Company performance might be negatively impacted. Other risks and
uncertainties that could negatively impact Company results include: delays in
or higher-than-anticipated expenses associated with implementing planned cost
reductions; the effectiveness of cost controls; the impact of changes in
accounting methods; the impact of export controls; the actual results of
outstanding litigation; changes in environmental laws and regulations; delays
in transferring and ramping production lines or completing customer
qualifications; the accuracy of customers' forecasts; the ability of current
manufacturing facilities to meet future operating needs; the rate of customer
inventory adjustments; push-out of delivery dates; product returns; changes
in customers' order patterns; the Company's mix of product shipments; the
actual growth of the portable electronics industry; the continued rapid
growth of demand for more efficient semiconductor components and power
conversion solutions; market and sector conditions that affect our customers,
licensees, and suppliers; pricing pressures; acceptance of competitors'
products; introduction, acceptance, and availability of new products;
inability of the Company to fund capital expenditures from existing credit
facilities or other external sources; the ability of suppliers and
subcontractors to meet their delivery commitments to the Company;
unanticipated impacts on the Company's business or financial condition due to
the euro conversion; the failure of the Company to realize the anticipated
efficiencies from its change in management structure; impact on the Company's
business from internal systems, or from the business or systems of suppliers,
customers, licensees and other third parties being adversely affected by year
2000 problems; and general economic conditions in the Company's markets
around the world.
23
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various risks including changes in interest rates
affecting the repayment of debt and return on investments and foreign
currency rate fluctuations. The Company does not hold or purchase any foreign
currency or interest rate contracts for trading purposes. The Company's
objective in managing the exposure to foreign currency changes is to reduce
the risk to earnings and cash flow by entering into forward exchange
contracts which are intended to reduce risks associated with the value of its
existing foreign currency assets, liabilities, firm commitments and
anticipated foreign revenues and costs. The gains and losses on these
contracts are intended to offset changes in the related exposures. The
Company does not hedge its foreign currency exposure in a manner that would
entirely eliminate the effects of changes in foreign exchange rates on the
Company's consolidated net income.
In the normal course of business, the Company also faces risks that are
either nonfinancial or nonquantifiable. Such risks principally include
country risk, credit risk and legal risk and are not discussed or quantified
in the following analyses.
INTEREST RATE RISK
The financial assets of the Company are not subject to significant interest
rate risk due to their short duration. The financial liabilities of the
Company that are subject to interest rate risk are its long-term debt
obligations as of September 30, 1999 (see Note 4 of the Notes to the
Unaudited Consolidated Financial Statements). A 70 basis-point increase in
interest rates (approximately 10% of the Company's weighted average interest
rate on debt) affecting the Company's financial instruments would have an
immaterial effect on the Company's results of operations, financial position
or cash flows.
Under the Company's new Credit Agreement entered into on June 30, 1999, the
Company is required to hedging the interest rate for at least half of the
$153.6 million in outstanding term loans under the agreement. The Company has
now entered into interest rate swap agreements to hedge 50% of these
outstanding term loans. The purpose of these swaps is to offset with a fixed
interest rate a portion of the risk inherent in this variable-rate debt. At
September 30, 1999, the Company held interest rate swaps with a notional
amount of $76.8 million out of a total portfolio of variable rate debt
outstanding in the amount of $153.6 million. Under these agreements, IR will
pay the counterparties (the parties assuming the interest rate risk) interest
at a weighted average fixed rate of 6.2% and the counterparties will pay IR
interest at a variable rate equal to LIBOR. The weighted average three-month
LIBOR rate applicable to these agreements was 5.6% at September 30, 1999.
FOREIGN CURRENCY RISK
The Company conducts business in various parts of the world and in various
foreign currencies. The Company manages potential foreign currency exposure
by entering into forward foreign exchange contracts or other non-speculative
risk management instruments to hedge foreign currency denominated receivables
and payables at certain of its international subsidiaries. At quarter-end,
the Company evaluated the effect that near-term changes in foreign exchange
rates would have had on the fair value of the Company's combined foreign
24
<PAGE>
currency position, related to its outstanding foreign currency forward
exchange contracts. If the Company assumed an adverse change of 10% in
foreign exchange rates, the potential decrease in the Company's foreign
currency position would have had an immaterial effect on the Company's
results of operations, financial position and cash flows.
25
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION
-----------------------------------
Registrant
November 17, 1999 /s/ MICHAEL P. MCGEE
------------------------------
Michael P. McGee
Executive Vice President,
Chief Financial Officer and
Principal Accounting Officer
26
<PAGE>
PART II. OTHER INFORMATION
None
27
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