<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 DECEMBER 31, 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 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 52,222,118 SHARES OF THE REGISTRANT'S COMMON STOCK, PAR VALUE
$1.00 PER SHARE, OUTSTANDING ON FEBRUARY 1, 2000.
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
ITEM 1. FINANCIAL STATEMENTS REFERENCE
<S> <C> <C>
Unaudited Consolidated Statement of
Income for the Three- and Six-Month Periods
Ended December 31, 1999 and 1998 2
Unaudited Consolidated Statement of Comprehensive
Income for the Three- and Six-Month Periods
Ended December 31, 1999 and 1998 3
Consolidated Balance Sheet as of
December 31, 1999 (unaudited) and
June 30, 1999 4
Unaudited Consolidated Statement of
Cash Flows for the Six-Month
Periods Ended December 31, 1999
and 1998 5
Notes to Unaudited Consolidated
Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 14
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES
ON MARKET RISK 21
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 24
</TABLE>
<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 SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
------------- ----------- ------------ --------------
(RESTATED)
<S> <C> <C> <C> <C>
Revenues $171,098 $132,837 $323,337 $260,330
Cost of sales 112,896 96,684 216,916 187,967
----------- ----------- ----------- -----------
Gross profit 58,202 36,153 106,421 72,363
Selling and administrative expense 27,084 24,398 53,740 48,605
Research and development expense 11,064 10,397 21,660 20,418
Restructuring charge - 12,000 - 12,000
----------- ----------- ----------- -----------
Operating profit (loss) 20,054 (10,642) 31,021 (8,660)
Other income (expense):
Interest, net (3,895) (2,905) (7,320) (5,356)
Other, net 600 43,829 600 44,347
----------- ----------- ----------- -----------
Income before income taxes and
cumulative effect of accounting
change 16,759 30,282 24,301 30,331
Provision for income taxes 4,375 10,488 6,788 10,503
----------- ----------- ----------- -----------
Income before cumulative effect of
accounting change 12,384 19,794 17,513 19,828
Cumulative effect of change in
accounting principle, net of
income tax benefit of $5,431 - - - (26,154)
----------- ----------- ----------- -----------
Net income (loss) $ 12,384 $ 19,794 $ 17,513 $ (6,326)
=========== =========== =========== ===========
Net income (loss) per common share - Basic:
Income before cumulative effect
of accounting change $ 0.24 $ 0.38 $ 0.34 $ 0.38
Cumulative effect of change in
accounting principle - - - (0.50)
----------- ----------- ----------- -----------
Net income (loss) per common share -
Basic $ 0.24 $ 0.38 $ 0.34 $ (0.12)
=========== =========== =========== ===========
Net income (loss) per common share - Diluted:
Income before cumulative effect
of accounting change $ 0.23 $ 0.38 $ 0.33 $ 0.38
Cumulative effect of change in
accounting principle - - - (0.50)
----------- ----------- ----------- -----------
Net income (loss) per common share -
Diluted $ 0.23 $ 0.38 $ 0.33 $ (0.12)
=========== =========== =========== ===========
Average common shares and potentially
dilutive securities outstanding
Basic 52,020 51,532 51,974 51,523
=========== =========== =========== ===========
Diluted 54,093 51,691 53,594 51,605
=========== =========== =========== ===========
</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 SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(RESTATED)
Net income (loss) $12,384 $19,794 $17,513 $(6,326)
Other comprehensive income (loss), net of
tax effect:
Foreign currency translation
adjustments (659) (53) 1,039 1,977
---------- ----------- ----------- -----------
Comprehensive income (loss) $11,725 $19,741 $18,552 $(4,349)
=========== =========== =========== ===========
Related deferred tax expense (benefit) $ (184) $ (18) $ 290 $ 684
=========== =========== =========== ===========
</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>
DECEMBER 31,
1999 JUNE 30,
(UNAUDITED) 1999
--------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 30,028 $ 31,497
Short-term investments - 8,900
Trade accounts receivable, net 145,804 121,659
Inventories 110,239 108,463
Deferred income taxes 15,069 16,078
Prepaid expenses and other receivables 15,407 19,677
-------- ---------
Total current assets 316,547 306,274
Property, plant and equipment, net 377,920 380,504
Other assets 24,422 22,307
-------- ---------
Total assets $718,889 $709,085
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank loans $ 13,536 $ 14,996
Long-term debt, due within one year 7,904 8,047
Accounts payable 63,810 64,809
Accrued salaries, wages and commissions 17,444 19,546
Other accrued expenses 33,562 33,234
-------- ---------
Total current liabilities 136,256 140,632
Long-term debt, less current maturities 152,620 158,418
Other long-term liabilities 6,719 7,142
Deferred income taxes 5,608 6,619
Stockholders' equity:
Common stock 52,061 51,781
Capital contributed in excess of par value 260,326 257,746
Retained earnings 110,381 92,868
Accumulated other comprehensive loss (5,082) (6,121)
-------- ---------
Total stockholders' equity 417,686 396,274
-------- ---------
Total liabilities and stockholders' equity $718,889 $709,085
======== =========
</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>
SIX MONTHS ENDED
DECEMBER 31,
1999 1998
---------- --------
(RESTATED)
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $17,513 $ (6,326)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 26,316 23,285
Deferred income (300) (300)
Deferred income taxes (8) 2,444
Deferred compensation (92) (6,193)
Restructuring charge - 14,500
Cumulative effect of accounting change - 26,154
Change in working capital (20,125) (13,978)
---------- --------
Net cash provided by operating activities 23,304 39,586
---------- --------
Cash flow from investing activities:
Additions to property, plant and equipment (23,290) (38,468)
Purchase of short-term investments (3,000) (4,000)
Proceeds from sale of short-term investments 11,900 13,232
Change in other noncurrent assets (2,027) 336
---------- --------
Net cash used in investing activities (16,417) (28,900)
---------- --------
Cash flow from financing activities:
Net repayments of short-term bank debt (1,800) (20,475)
Proceeds from issuance of long-term debt 52 42,443
Payments on long-term debt and obligations
under capital leases (5,900) (43,352)
Net proceeds from issuance of common stock 2,840 1,216
Other (3,970) (694)
---------- --------
Net cash used in financing activities (8,778) (20,862)
---------- --------
Effect of exchange rate changes on cash and
cash equivalents 422 740
---------- --------
Net decrease in cash and cash equivalents (1,469) (9,436)
Cash and cash equivalents, beginning of period 31,497 32,294
---------- --------
Cash and cash equivalents, end of period $30,028 $22,858
========== ========
</TABLE>
5
The accompanying notes are an integral part of this statement.
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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 December 31, 1999 and the consolidated results
of operations and cash flows for the six-month periods ended December 31,
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 six-month period ended December
31, 1999 are not necessarily indicative of the results to be expected for
the full year.
The accompanying unaudited 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 calendar under which the six months ended
December 31, 1999 and 1998 consisted of 26 weeks, respectively.
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-
and six-month periods ended December 31, 1999 and 1998 (in thousands except
per share amounts):
6
<PAGE>
<TABLE>
<CAPTION>
NET INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
Three Months ended December 31, 1999
Net income per common share - Basic... $12,384 52,020 $0.24
Effect of dilutive securities:
Stock options..................... 2,073
--------------------------------------------------------------
Net income per common share - Diluted $12,384 54,093 $0.23
==============================================================
NET INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
Three Months ended December 31, 1998
Net income per common share - Basic..... $19,794 51,532 $0.38
Effect of dilutive securities:
Stock options....................... 159
--------------------------------------------------------------
Net income per common share - Diluted $19,794 51,691 $0.38
==============================================================
NET INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
Six Months ended December 31, 1999
Net income per common share - Basic... $17,513 51,974 $0.34
Effect of dilutive securities:
Stock options....................... 1,620
--------------------------------------------------------------
Net income per common share - Diluted $17,513 53,594 $0.33
==============================================================
NET INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
Six Months ended December 31, 1998 (restated)
Net loss per common share - Basic...... $(6,326) 51,523 $(0.12)
Effect of dilutive securities:
Stock options....................... 82
--------------------------------------------------------------
Net loss per common share - Diluted $(6,326) 51,605 $(0.12)
==============================================================
</TABLE>
3. INVENTORIES
Inventories are stated at the lower of cost (principally first-in,
first-out) or market. Inventories at December 31, 1999 and June 30, 1999
(audited) were comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999 JUNE 30, 1999
----------------- -------------
<S> <C> <C>
Raw materials $ 15,769 $ 15,277
Work-in-process 52,908 52,124
Finished goods 41,562 41,062
-------- ---------
$110,239 $108,463
======== =========
</TABLE>
7
<PAGE>
4. LONG-TERM DEBT AND OTHER LOANS
A summary of the Company's long-term debt and other loans at December 31,
1999 is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
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 8.6% and 11.0%,
due in 2004 and 2005 $152,134
Capitalized lease obligations payable in varying monthly
installments primarily at rates from 6.3% to 8.2%, due in
2002 though 2004 4,838
Foreign bank loans collateralized by property and/or equipment,
payable in varying monthly installments at 10.8%, due in 2000 107
Foreign unsecured bank loans payable in varying monthly
installments at rates from 4.3% to 8.4%, due in 2003
through 2006 3,445
-------------
Debt, including current portion of long-term debt of $7,904 160,524
Foreign unsecured revolving bank loans at rates from 1.5% to 8.5% 13,536
-------------
Total Debt $174,060
============
</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 December 31, 1999, $152.1 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 and 2.0% to 2.5% above the applicable base rate. The
base rate applies to borrowings which are shorter than 30 days. 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
8
<PAGE>
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 six 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,
which was charged to Cost of Sales, 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, after appropriate notification was
given to 43 remaining affected employees in the sales, customer service
and administrative areas, the Company recorded a charge of $4.2 million
relating to additional severance costs. 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 were primarily relatively
high-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 December 31, 1999, the Company had eliminated 64 positions, paid $6.0
million for termination benefits related to this program and recorded the
asset impairment of $8.6 million. The remaining unutilized restructuring
accrual of $4.1 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 six 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 included 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 December 31, 1999, the Company had eliminated 25 positions and paid $4.9
million in termination benefits. The remaining unutilized severance accrual
of $3.4 million at December 31, 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 six months.
6. GEOGRAPHICAL INFORMATION
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 131 in fiscal 1999. The Company operates in one operating 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):
9
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues from Unaffiliated Customers
England.................................. $ 20,515 $ 18,387 $ 37,970 $ 38,692
Singapore................................ 30,786 18,314 57,368 36,900
Other Foreign............................ 47,899 32,152 89,376 58,549
--------------------------------------------------------------
Subtotal - Foreign...................... 99,200 68,853 184,714 134,141
United States............................ 64,198 57,275 123,511 115,042
Unallocated royalties.................... 7,700 6,709 15,112 11,147
--------------------------------------------------------------
Total................................ $171,098 $132,837 $323,337 $260,330
==============================================================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999 JUNE 30, 1999
------------------ -------------
<S> <C> <C>
Identifiable Assets
England............................................... $ 83,782 $103,002
Singapore............................................. 66,457 62,625
Other Foreign......................................... 60,718 32,549
---------------------------------------------
Subtotal - Foreign................................... 210,957 198,176
United States......................................... 452,445 482,636
Corporate assets...................................... 55,487 28,273
---------------------------------------------
Total............................................. $718,889 $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% of the Company's consolidated net revenues
in the six months ended December 31, 1999. The same customer accounted for
10.6% of the Company's consolidated net revenues in the three months ended
December 31, 1999. No single customer accounted for more than 10% of the
Company's consolidated net revenues in the three or six months ended
December 31, 1998, respectively.
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 parties. The Company
cannot make assurances that changes in environmental laws and
10
<PAGE>
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 directed to Rachelle, dated July 25, 1995,
from the U.S. Department of Justice 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 for the cost of the
final remedy would, if made, likely be significant, although it should be
substantially below the demand amount for earlier phases of the OII Site
clean-up. Any demands related to the costs for the final remedy would be in
addition to the amount demanded 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 among PRPs by
11
<PAGE>
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. On September 14, 1999, the Company accepted the $68,330
settlement offer, which requires EPA acceptance, 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
On December 6, 1999, the Company filed suit in Federal District Court in
Los Angeles, California against Semiconductor Components Industries, LLC,
dba ON Semiconductor, alleging infringement of the following of the
Company's U.S. patents: 4,376,286; 4,959,699; 4,593,302; 4,680,853;
4,642,666; 4,705,759; 5,008,725; and 5,338,961. The suit seeks damages and
customary relief in such matters.
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 prospectuses and was denied in all other respects. 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.
12
<PAGE>
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. INCOME TAXES
The Company's effective tax rate for the six months ended December 31,
1999 was approximately 27.9%, which differs from the U.S. federal
statutory rate of 35% due primarily to higher statutory tax rates in
certain foreign jurisdictions, offset by foreign tax credits, research
and development credits, state tax credits, and decrease in valuation
allowances.
The Company's effective tax rate for the six months ended December 31,
1998 was approximately 34.6%, which differs from the U.S. federal statutory
rate of 35% due primarily to increase in valuation allowances, higher
statutory tax rates in certain foreign jurisdictions and foreign
jurisdiction losses without foreign tax benefit, offset by foreign tax
credits, research and development credits, and state tax credits.
11. INTEREST RATE SWAP AGREEMENT
Under the Company's new Credit Agreement entered into on June 30, 1999, the
Company is required to hedge the interest rate for at least half of the
$152.1 million in outstanding term loans under the agreement. The Company
has 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 December 31, 1999, the Company had interest rate swap agreements
in the amount of $75.8 million out of a total portfolio of variable rate
debt outstanding of $152.1 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 6.2% at
December 31, 1999.
12. 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 six months ending December 30, 1998 have been restated to
reflect the above charge.
13. SUBSEQUENT EVENT
On January 28, 2000, IR and Zing Technologies, Inc. announced that IR
agreed to acquire all the outstanding shares of Zing for a cash purchase
price of $15.36 per share. Zing's wholly-owned subsidiary and sole
operating business, Omnirel, supplies power semiconductor modules and
components. The net cash purchase price (net of Zing Technologies,
Inc.'s cash) for the transaction is $28.5 million. IR expects to
commence a cash tender offer in early February and expects to complete
the transaction in the quarter ended March 31, 2000. The Company expects
to fund the purchase price from its total liquidity at December 31, 1999
of $106.9 million.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE- AND SIX-MONTH PERIODS ENDED DECEMBER 31,
1999 COMPARED WITH THE THREE- AND SIX-MONTH PERIODS ENDED DECEMBER 31, 1998
The following table sets forth certain items as a percentage of revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
(UNAUDITED) (UNAUDITED)
1999 1998 1999 1998
-------- ------- ---------- ----------
(RESTATED)
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 66.0 72.8 67.1 72.2
------- ------- ------- -------
Gross profit 34.0 27.2 32.9 27.8
Selling and administrative expense 15.8 18.4 16.6 18.7
Research and development expense 6.5 7.8 6.7 7.8
Restructuring charge - 9.0 - 4.6
------- ------- ------- -------
Operating profit (loss) 11.7 (8.0) 9.6 (3.3)
Interest expense, net (2.3) (2.2) (2.3) (2.1)
Other income, net 0.4 33.0 0.2 17.0
------- ------- ------- -------
Income before income taxes and cumulative
effect of accounting change 9.8 22.8 7.5 11.6
Provision for income taxes 2.6 7.9 2.1 4.0
------- ------- ------- -------
Income before cumulative effect of
accounting change 7.2 14.9 5.4 7.6
Cumulative effect of accounting change - - - -
------- ------- ------- -------
(10.0)
Net income (loss) 7.2% 14.9% 5.4% (2.4)%
======= ======= ======= =======
</TABLE>
Revenues for the three-month period ended December 31, 1999 increased 28.8%
to $171.1 million from $132.8 million in the year-ago period. Revenues for
the six-month period ended December 31, 1999 increased 24.2% to $323.3
million from $260.3 million in the year-ago period. The revenue increase
reflected strong demand in portable and consumer electronics, computers and
servers and motor controls. Revenues in the six-month period included $15.1
million of net patent royalties, versus $11.1 million in the comparable
prior-year period, reflecting a number of new license agreements and market
growth. Royalty revenues in the three-month periods ended December 31, 1999
and 1998 were $7.7 million and $6.7 million, respectively.
Product sales by region are based on the location to which the product is
shipped. For the six months ended December 31, 1999, revenues were approximately
37% from North America, 24% from Europe and 39% from Asia, which includes Japan
and Asia Pacific, compared to 41%, 26% and 33%, respectively, in the prior-year
period. For the three months ended December 31, 1999 and 1998, product sales by
region (based on the location of the customer) were approximately 36% from North
America, 24% from Europe and 40% from Asia, which includes Japan and Asia
Pacific, compared to 41%, 25% and 34%, respectively. Revenue in Asia Pacific
grew 51% over the prior-year period, reflecting the continued move of
14
<PAGE>
American and European manufacturing activities to this region as well as
strong demand in all sectors of the Asia Pacific market. Twenty percent
growth year-to-year from Japan reflects strong demand for proprietary
products and improved market conditions. Europe remains stable, with
continuing strength in the automotive and cellular phone industries. North
America sales remained constant, despite the impact of several of our U.S.
customers refocusing their assemblies into their Asian operations.
December-quarter gross profit, including non-recurring items, increased to $58.2
million (34.0% of revenues) from $36.2 million (27.2% of revenues) in the
comparable year-ago quarter. Gross profit including non-recurring items for the
six-month period ended December 31, 1999 increased to $106.4 million (32.9% of
revenues) from $72.4 million (27.8% of revenues) in the year-ago period. The
gross margin increase reflected a higher proportion of revenue from proprietary
products, lower manufacturing costs as a result of continued manufacturing
efficiencies and restructuring efforts, and firm pricing. During December 1998,
$2.5 million was charged to the cost of goods sold due to the write-down of
inventory as a result of the planned relocation of assembly lines from the
Company's facility in England to its facility in Mexico. Excluding the inventory
charge, gross profit for the six-month period ended December 31, 1998 was 28.8%
of revenue. See "Notes to Unaudited Consolidated Financial Statements Note 5.
Impairment of Assets and Restructuring Charges".
In the three- and six-month periods ended December 31, 1999, selling and
administrative expense was $27.1 million and $53.7 million (15.8% and 16.6% of
revenues), respectively, versus $24.4 million and $48.6 million (18.4% and 18.7%
of revenues) in the comparable year-ago periods. The reduction in the ratio of
selling and administrative expense to revenues reflects the results of ongoing
initiatives to increase the productivity of selling and administrative
activities and the benefit of restructuring programs. Selling and administrative
expenses as a percentage of revenues is expected to decrease with rising sales.
In the three- and six-month periods ended December 31, 1999, the Company's
research and development expenditures increased to $11.1 million and $21.7
million (6.5% and 6.7% of revenues), respectively, compared to $10.4 million and
$20.4 million (7.8% and 7.8% of revenues) in the comparable prior-year periods.
The Company anticipates an increased level of research and development
expenditures 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.
Other income was $0.6 million in the first half of fiscal 2000 versus other
income of $44.3 million in the comparable prior-year period. During the second
quarter of fiscal 1999, the Company recorded a $43.5 million pretax benefit
related to the settlement of patent litigation. The income reported from these
settlements was net of advanced and deferred royalty payments, patent defense
costs, and the share of the Company's royalty proceeds payable to Unitrode
Corporation.
Net interest expense increased $1.0 million and $2.0 million in the three-
and six-month periods ended December 31, 1999, compared to the respective
prior-year periods. This increase reflects higher interest rates resulting
from the terms of the new credit agreement entered into at the end of the
fourth quarter of fiscal 1999.
Net foreign currency gains and losses were less than $1.0 million in each
six-month period.
The Company's effective tax rate for the six months ended December 31, 1999
was approximately 27.9%, which differs from the U.S. federal statutory rate
of 35% due primarily to higher statutory tax rates in certain foreign
jurisdictions, offset by foreign tax credits, research and development
credits, state tax credits, and decrease in valuation allowances.
The Company's effective tax rate for the six months ended December 31, 1998
was approximately 34.6%, which differs from the U.S. federal statutory rate
of 35% due primarily to increase in valuation allowances, higher statutory
tax rates in certain foreign jurisdictions and foreign jurisdiction losses
without foreign tax benefit, offset by foreign tax credits, research and
development credits, and state tax credits.
15
<PAGE>
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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had cash and cash equivalent balances of $30.0
million. During the six-month period ended December 31, 1999, operating
activities increased cash flow by $23.3 million.
Net investing activities consumed $16.4 million, primarily due to capital
expenditures of $23.3 million, offset in part by the liquidation of short-term
investments. At December 31, 1999, the Company had made purchase commitments for
capital expenditures of approximately $18.8 million. Based on current market
conditions and assumptions, the Company plans fiscal 2000 capital investments
of approximately $75 million, principally for fabrication and assembly capacity
to meet market demand. The Company intends to fund capital expenditures,
including, without limitation, the acquisition of all outstanding shares of Zing
Technologies, Inc., 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, 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.
Cash used in financing activities consumed $8.8 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
December 31, 1999, $152.1 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 and 2.0% and 2.5% above the
applicable base rate. The base rate applies to borrowings which are shorter
than 30 days. 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.
16
<PAGE>
The Company also had $20.4 million in foreign revolving lines of credit,
against which $13.5 million had been borrowed. Foreign term loan facilities
of $3.6 million and equipment financing facilities of $4.8 million were both
fully utilized. As of December 31, 1999, the Company had credit facilities of
$250.9 million, against which $174.1 million had been borrowed.
Based on cash and cash equivalents on hand and its unused credit facilities,
at December 31, 1999, the Company's liquidity was $106.9 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.
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 in non-cash
transactions. On January 1, 2002, euro-denominated bills and coins will be
issued and the participating country's present currency will be gradually
withdrawn during a short period of dual circulation of no more than three
months.
The Company has undertaken an internal analysis to determine the effects of the
January 1, 2002 conversion. The 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, which was charged to
Cost of Sales, 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, after
appropriate notification was given to 43
17
<PAGE>
remaining affected employees in the sales, customer service and administrative
areas, the Company recorded a charge of $4.2 million relating to additional
severance costs. 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 were
primarily relatively high-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 total approximately $5 million in
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 December 31, 1999, the Company had eliminated 64 positions, paid $6.0
million for termination benefits related to this program and recorded the asset
impairment of $8.6 million. The remaining unutilized restructuring accrual of
$4.1 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 six 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 included 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 December 31,
1999, the Company had eliminated 25 positions and paid $4.9 million in
termination benefits. The remaining unutilized severance accrual of $3.4 million
at December 31, 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 six 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." Issued by the American Institute of Certified Public Accountants
("AICPA"), SOP 98-1 provides standards on accounting for the costs of computer
software developed or obtained for internal use. The new standards do not
significantly differ from the Company's previous accounting treatment for
software developed or obtained for internal use and 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 AICPA, requires most entities to
expense all start-up and preoperating costs as they are incurred. The Company
previously followed the accounting practice of deferring such costs until the
start-up of each new process and then amortizing those costs over the life of
the related asset. The change was required to be made retroactive to the
first quarter of the fiscal year in which it was adopted. The cumulative
effect of this change in accounting principle, net of income tax benefit
18
<PAGE>
of $5.4 million, was $26.2 million, $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 Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("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 No. 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 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 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. The Company
is currently estimating $7.5 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 December 31, 1999, the Company
has expensed $6.9 million of this estimate.
The Company has successfully completed the verification process for all internal
information systems, factory equipment, facilities, suppliers and business
partners. To date, the Company has not experienced any business interruptions
due to any Year 2000 related cause and has concluded all of its planned
investigation and remediation related to the Year 2000 issue.
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.
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. There can be
no assurance that the Company's compliance efforts and contingency plans will
adequately address every issue that may arise
19
<PAGE>
in the year 2000. The costs of the Company's Year 2000 remediation reflect 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.
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; the impact of changes in accounting methods;
the impact of trade and export regulations and policies; 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 failure 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; unfavorable changes in industry and competitive conditions;
and continued improvement in economic conditions in the Company's markets
around the world.
20
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various risks, including changes in interest rates
that affect 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 principally short-term investments
that are not subject to significant interest rate risk. The financial
liabilities of the Company that are subject to interest rate risk are its
long-term debt obligations as of December 31, 1999 (see Note 4 of the Notes
to the Unaudited Consolidated Financial Statements). An increase in interest
rates of as much as 70 basis points (approximately 10% of the Company's
weighted average interest rate on debt) affecting the Company's financial
instruments would not have a material 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 hedge the interest rate for at least half of the
$152.1 million in outstanding term loans under the agreement. The Company has
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 December 31,
1999, the Company had $75.8 million in interest swap agreements out of a
total portfolio of variable rate debt outstanding of $152.1 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
6.2% at December 31, 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
currency position, related to its outstanding foreign currency forward
exchange contracts. If the Company experienced an adverse change in foreign
exchange rates of as much as 10%, the
21
<PAGE>
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.
22
<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
February 3, 2000 MICHAEL P. MCGEE
------------------------------
Michael P. McGee
Executive Vice President,
Chief Financial Officer and
Principal Accounting Officer
23
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to a vote of the stockholders of the
Company at the Company's Annual Meeting of Stockholders held on November 22,
1999, with the following results:
AUTHORITY
Description of matter FOR WITHHELD
1. Election of Directors
Rochus E. Vogt 47,472,499 912,913
Robert J. Mueller 47,461,038 924,374
Alexander Lidow 47,433,524 951,888
Minoru Matsuda 47,470,244 915,168
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
<S> <C> <C> <C>
2. Approval of the 2000 Stock Incentive Plan 23,226,165 15,951,168 454,124
Broker Non-Vote on Proposal 2 8,753,955
FOR AGAINST ABSTENTIONS
3. Ratification of PricewaterhouseCoopers LLP
as Independent Auditors for fiscal 2000 48,134,300 168,918 81,850
Broker Non-Vote on Proposal 3 344
</TABLE>
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-02-2000
<PERIOD-START> JUL-05-1999
<PERIOD-END> JAN-02-2000
<CASH> 30,028
<SECURITIES> 0
<RECEIVABLES> 147,613
<ALLOWANCES> 1,809
<INVENTORY> 110,239
<CURRENT-ASSETS> 316,547
<PP&E> 640,255
<DEPRECIATION> 262,336
<TOTAL-ASSETS> 718,889
<CURRENT-LIABILITIES> 136,256
<BONDS> 0
0
0
<COMMON> 52,061
<OTHER-SE> 365,625
<TOTAL-LIABILITY-AND-EQUITY> 718,889
<SALES> 323,337
<TOTAL-REVENUES> 323,337
<CGS> 216,916
<TOTAL-COSTS> 216,916
<OTHER-EXPENSES> 75,400
<LOSS-PROVISION> 168
<INTEREST-EXPENSE> 7,320
<INCOME-PRETAX> 24,301
<INCOME-TAX> 6,788
<INCOME-CONTINUING> 17,513
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,513
<EPS-BASIC> 0.34
<EPS-DILUTED> 0.33
</TABLE>
