<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, 2000
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 61,973,255 SHARES OF THE REGISTRANT'S COMMON STOCK, PAR VALUE
$1.00 PER SHARE, OUTSTANDING ON NOVEMBER 13, 2000.
Page 1 of 24
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
REFERENCE
---------
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Unaudited Consolidated Statement of
Income for the Three-Month Periods
Ended September 30, 2000 and 1999 3
Unaudited Consolidated Statement of Comprehensive
Income for the Three-Month Periods
Ended September 30, 2000 and 1999 4
Unaudited Consolidated Balance Sheet as of September
30, 2000 and June 30, 2000 (audited) 5
Unaudited Consolidated Statement of
Cash Flows for the Three-Month
Periods Ended September 30, 2000
and 1999 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. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 22
PART II. OTHER INFORMATION
ITEM 4. EXHIBITS 23
</TABLE>
Page 2 of 24
<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
--------------------------
2000 1999
----------- ------------
<S> <C> <C>
Revenues $ 249,435 $ 152,239
Cost of sales 150,732 104,020
--------- ---------
Gross profit 98,703 48,219
Selling and administrative expense 33,787 26,656
Research and development expense 14,951 10,596
--------- ---------
Operating profit 49,965 10,967
Other income (expense):
Net interest income (expense) 5,891 (3,425)
Other, net 260 --
--------- ---------
Income before income taxes 56,116 7,542
Provision for income taxes 14,029 2,413
--------- ---------
Net income $ 42,087 $ 5,129
========= =========
Net income per common share - Basic: $ 0.68 $ 0.10
========= =========
Net income per common share - Diluted: $ 0.63 $ 0.10
========= =========
Average common shares outstanding - Basic 61,831 51,928
========= =========
Average common shares and potentially dilutive
securities outstanding - Diluted 66,661 53,096
========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
Page 3 of 24
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2000 1999
----------- ------------
<S> <C> <C>
Net income $ 42,087 $ 5,129
-------- --------
Other comprehensive income (loss), net of
tax effect of $637 and $(799) respectively:
Foreign currency translation adjustments (3,946) 1,698
Unrealized gains on securities:
Unrealized holding gains arising during 2,035 --
the period -------- --------
Other comprehensive income (loss) $ (1,911) $ 1,698
-------- --------
Comprehensive income $ 40,176 $ 6,827
======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
Page 4 of 24
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
2000 JUNE 30,
(UNAUDITED) 2000
---------------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 654,484 $ 196,406
Short-term investments 158,836 57,930
Trade accounts receivable, net 190,661 180,349
Inventories 118,150 117,974
Deferred income taxes 22,535 21,953
Prepaid expenses and other receivables 29,428 17,011
Total current assets 1,174,094 591,623
Property, plant and equipment, net 405,120 390,787
Other assets 65,045 43,560
------------ ------------
Total assets $ 1,644,259 $ 1,025,970
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank loans $ 12,070 $ 12,089
Long-term debt, due within one year 1,836 1,984
Accounts payable 89,020 85,580
Accrued salaries, wages and commissions 19,476 17,757
Other accrued expenses 46,792 32,750
------------ ------------
Total current liabilities 169,194 150,160
Long-term debt, less current maturities 553,703 4,589
Other long-term liabilities 7,042 8,486
Deferred income taxes 20,989 18,669
Stockholders' equity:
Common stock 61,951 61,594
Capital contributed in excess of par value 635,850 627,118
Retained earnings 203,292 161,205
Accumulated other comprehensive loss (7,762) (5,851)
------------ ------------
Total stockholders' equity 893,331 844,066
------------ ------------
Total liabilities and stockholders' $ 1,644,259 $ 1,025,970
equity ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
Page 5 of 24
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2000 1999
---------- ----------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $ 42,087 $ 5,129
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 14,847 13,147
Deferred income (150) (150)
Deferred income taxes 1,888 (6)
Deferred compensation -- 4
Change in working capital (6,082) (4,488)
---------- ----------
Net cash provided by operating activities 52,590 13,636
---------- ----------
Cash flow from investing activities:
Additions to property, plant and equipment (27,018) (16,271)
Proceeds from sale of property, plant & equipment 713 --
Purchase of short-term investments (100,924) (3,000)
Proceeds from sale of short-term investments -- 8,900
Change in other investing activities (1,862) (1,085)
---------- ----------
Net cash used in investing activities (129,091) (11,456)
---------- ----------
Cash flow from financing activities:
Net proceeds (repayments) of short-term bank debt 863 (3,400)
Proceeds from issuance of convertible debt, net 529,964 (122)
Payments on long-term debt and obligations
under capital leases (1,118) (2,549)
Proceeds from exercise of stock options 9,088 3,287
Other, net (3,810) (3,810)
---------- ----------
Net cash provided by (used in) financing activities 534,987 (6,594)
---------- ----------
Effect of exchange rate changes on cash and
cash equivalents (408) 478
---------- ----------
Net increase in cash and cash equivalents 458,078 (3,936)
Cash and cash equivalents, beginning of period 196,406 31,497
---------- ----------
Cash and cash equivalents, end of period $ 654,484 $ 27,561
========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
Page 6 of 24
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of the Company
and all of its majority-owned subsidiaries, which are located in North
America, Europe, Mexico, Japan, India and Southeast Asia. All significant
intercompany transactions, balances and profits have been eliminated in
consolidation.
The consolidated financial statements included herein are unaudited;
however, they contain all normal recurring adjustments which, in the
opinion of management, are necessary to present fairly the consolidated
financial position of the Company at September 30, 2000 and the
consolidated results of operations and cash flows for the three-month
periods ended September 30, 2000 and 1999. 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, 2000 are not necessarily
indicative of the results to be expected for the full year.
The accompanying unaudited consolidated financial statements should be
read in conjunction with the Annual Report on Form 10-K for the fiscal
year ended June 30, 2000.
The Company operates on a fiscal calendar under which the three months
ended September 30, 2000 and 1999 consisted of 13 weeks each.
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, such as options, that would have been outstanding using the
treasury stock method for the exercise of options. The Company's use of
the treasury stock method also reduces the gross number of dilutive
shares by the number of shares purchasable from the proceeds of the
options assumed to be exercised.
The following table provides a reconciliation of the numerator and
denominator of the Basic and Diluted per-share computations for the
three-month periods ended September 30, 2000 and 1999 (in thousands
except per share amounts):
Page 7 of 24
<PAGE>
2. NET INCOME PER COMMON SHARE (CON'T)
<TABLE>
<CAPTION>
Net Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Three Months ended September 30, 2000
Net income per common share - Basic $ 42,087 61,831 $ 0.68
Effect of dilutive securities:
Stock options................................ -- 4,830 (0.05)
----------- ------------- ---------
Net income per common share - Diluted $ 42,087 66,661 $0.63
=========== ============= =========
<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
=========== ============= =========
</TABLE>
3. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
three months or less to be classified as cash equivalents. The cost of
these investments approximates fair value.
4. INVESTMENTS
The Company considers all investments, besides cash and cash equivalents,
with maturities up to 15 months or less to be available-for-sale under
the Statement of Financial Accounting Standards No. ("SFAS") 115,
"Accounting for Certain Investments in Debt and Equity Securities", which
are reported in the balance sheet as short-term investments at their fair
market value.
Available-for-Sale Securities as of September 30, 2000:
SHORT-TERM INVESTMENTS:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gain Loss Value
-------------- ----------------- ----------------- -----------
<S> <C> <C> <C> <C>
Corporate Debt 97,740 34 (48) 97,726
U.S. Government and Agency Obligations 13,157 10 (5) 13,162
Mortgage and asset backed obligations 4,939 13 - 4,952
Other Debt 42,994 4 (2) 42,996
-------------- ----------------- ----------------- -----------
158,831 61 (55) 158,836
============== ================= ================= ===========
</TABLE>
Page 8 of 24
<PAGE>
LONG-TERM INVESTMENTS:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gain Loss Value
--------------- ----------------- ----------------- -----------
<S> <C> <C> <C> <C>
Equity Securities 7,776 280 - 8,056
=============== ================= ================= ===========
</TABLE>
5. INVENTORIES
Inventories are stated at the lower of cost (principally first-in,
first-out) or market. Inventories at September 30, 2000 and June 30, 2000
(audited) were comprised of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 JUNE 30, 2000
------------------ -------------
<S> <C> <C>
Raw materials $ 23,488 $ 18,296
Work-in-process 54,726 59,654
Finished goods 39,936 40,024
------------ -------------
$ 118,150 $ 117,974
============ =============
</TABLE>
Page 9 of 24
<PAGE>
6. BANK LOANS AND LONG-TERM DEBT
A summary of the Company's long-term debt and other loans at September
30, 2000 and June 30, 2000 (audited) is as follows (in thousands):
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
------------- ---------
<S> <C> <C>
Convertible subordinated notes at 4.25% due 2007 $550,000 $ --
Capitalized lease obligations payable in varying monthly
installments primarily at rates from 6.3% to 12%,
due in 2002 though 2004 4,155 4,406
Foreign bank loans collateralized by property and/or
equipment, payable in varying monthly installments 134 233
at 10.8%, due in 2004
Foreign unsecured bank loans payable in varying monthly
installments at rates from 4.3% to 8.4%, due in 2001
through 2006 1,250 1,934
-------- --------
Debt, including current portion of long-term debt ($1,836
September 2000 and $1,984 June 2000,
respectively) 555,539 6,573
Foreign unsecured revolving bank loans at rates
from 1.5% to 8.5% 12,070 12,089
-------- --------
Total Debt $567,609 $ 18,662
======== ========
</TABLE>
On July 13, 2000, the Company sold $550 million principal amount of
4 1/4 % Convertible Subordinated Notes due 2007. The interest rate
is 4 1/4% per annum on the principal amount, payable semi-annually
in arrears in cash on January 15 and July 15 of each year, beginning
January 15, 2001. The notes are convertible into shares of the
Company's common stock at any time on or before July 15, 2007, at a
conversion price of $73.935 per share, subject to adjustment if
certain events affecting the Company's common stock occur. The notes
are subordinated to all of the Company's existing and future senior
indebtedness and to all debt and other liabilities of the Company's
subsidiaries. The Company may redeem any of the notes, in whole or
in part, on or after July 18, 2003, by giving at least 30 days
notice at the following prices expressed as a percentage of the
principal amount:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
------ ------------
<S> <C>
Beginning on July 18, 2003 and ending on July 14, 2004......................... 102.429%
Beginning on July 15, 2004 and ending on July 14, 2005......................... 101.821%
Beginning on July 15, 2005 and ending on July 14, 2006......................... 101.214%
Beginning on July 15, 2006 and ending on July 14, 2007......................... 100.607%
</TABLE>
Page 10 of 24
<PAGE>
The Company filed a shelf registration statement with the SEC on October
16, 2000 covering the resale of the notes and the underlying common
stock. The Company has agreed to use reasonable efforts to have the
registration statement declared effective within 180 days of the date of
filing and to use reasonable efforts to keep the shelf registration
statement effective until either of the following has occurred:
- All securities covered by the registration statement have been
sold; or
- The expiration of the holding period applicable with respect to
the notes and the underlying common stock under Rule 144(k) under
the Securities Act, or any successor provision.
The notes and the common stock issuable upon conversion of the notes have
not been registered under the Securities Act and are subject to certain
restrictions on transfer.
7. RESTRUCTURING AND SEVERANCE CHARGES
During December 1998, 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 and to centralize more of its European customer
service and administrative activities, resulting in reductions in
personnel. The Company has completed this operational transition. The
charge consisted of $5.9 million for estimated severance costs associated
with the elimination of approximately 350 positions, primarily consisting
of 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, which consist
primarily of building improvements relating to the high-volume assembly
production lines and production information systems, remain in use and
all of them have been abandoned. In the third quarter of fiscal 1999, the
Company recorded a final 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 December 1998 restructuring, as the 43
positions included in the March 1999 restructuring were primarily
relatively highly paid employees in sales and administrative management.
The approximately 350 positions in the December 1999 restructuring were
primarily operators and technicians who on average have a much lower
salary level.
As of September 30, 2000, the Company had eliminated 344 positions, paid
$10.1 million for termination benefits related to this program and
recorded the asset impairment of $8.6 million.
During June, 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 September 30,
2000, the Company had eliminated 36 positions and paid $6.7 million in
Page 11 of 24
<PAGE>
termination benefits. The remaining unutilized severance accrual of $1.6
million at September 30, 2000, which is classified as current, relates to
severance payments to certain employees who were notified prior to June
30, 2000 of the elimination of their positions.
8. GEOGRAPHICAL INFORMATION
The Company operates in one business segment. Revenues from unaffiliated
customers are based on the location in which the sale originated.
Geographic information for September 30, 2000 and 1999 is presented below
(000's):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
2000 1999
---- ----
<S> <C> <C>
REVENUES FROM UNAFFILIATED CUSTOMERS
Asia Pacific and Japan...................... $ 90,568 $51,191
Europe...................................... 52,190 34,322
North America............................... 95,267 59,314
---------------------------------
Subtotal................................ 238,025 144,827
Unallocated royalties....................... 11,410 7,412
---------------------------------
Total................................... $249,435 $152,239
=================================
<CAPTION>
SEPTEMBER 30, JUNE 30,
2000 1999
---- ----
<S> <C> <C>
LONG-LIVED ASSETS
Asia Pacific and Japan................................... $10,603 $4,746
Europe................................................... 41,036 43,086
North America............................................ 418,526 386,515
---------------------------------
Total................................................ $470,165 $434,347
=================================
</TABLE>
One distributor accounted for 11.6% of the Company's consolidated net
revenues in the three months ended September 30, 2000. The same
distributor accounted for 11.1% of the Company's consolidated net
revenues in the three months ended September 30, 1999.
9. 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
regulations will not require additional investments in capital equipment
and the
Page 12 of 24
<PAGE>
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 also 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. Counsel for
Rachelle received a request from the EPA in June 2000 to update the name
of the contact party for Rachelle designated to receive information on
future proposed settlements. The request appears to have been sent to all
PRPs and indicated that the EPA intends to formulate a final settlement
offer in the near future.
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
Page 13 of 24
<PAGE>
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 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 down gradient 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.
10. 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 5,130,767 patent is currently
undergoing reexamination in the PTO. The PTO issued a decision upholding
the patentability of all the claims of another of the Company's MOSFET
patents, its 5,008,725 patent, and issued a Notice of Intent to Issue a
Reexamination Certificate.
11. LITIGATION
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 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
Page 14 of 24
<PAGE>
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 currently
scheduled for February 6, 2001.
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.
On June 22, 2000, the Company filed suit in Federal District Court in Los
Angeles, California against IXYS Corporation alleging infringement of
certain of the Company's U.S. patents. The suit seeks damages and other
relief customary in such matters. On August 17, 2000, IXYS filed an
answer and counterclaim denying infringement and alleging patent
invalidity and unenforceability.
12. INCOME TAXES
The Company's effective tax rate for the three months ended September 30,
2000 was approximately 25%, which differs from the U.S. federal statutory
tax rate of 35%. The lower effective tax rate reflects foreign tax
credits, research and development credits, state tax credits, and lower
valuation allowances, partially offset by higher statutory tax rates in
certain foreign jurisdictions and foreign jurisdiction losses without
foreign tax benefit.
The Company's effective tax rate for the three months ended September 30,
1999 was approximately 32%, which differs from the U.S. federal statutory
tax rate of 35%. The lower effective tax rate is due primarily to lower
valuation allowances, the benefit of foreign tax and research and
development credits, which are partially offset by higher statutory tax
rates and foreign jurisdiction losses without foreign tax benefit.
13. SUBSEQUENT EVENT
In November 2000, the Company entered into a three-year syndicated
multi-currency revolving credit facility with BNP Paribas in New York,
and seven other banks, which will provide a credit line of $150
million. The Credit Agreement will allow borrowing by the Company's
foreign subsidiaries, and provide funding for the Company's general
corporate purposes. The facility bears interest at (i) local currency
rates plus (ii) a margin of between 0.25% and 1.125% for Base Rate
Advances and a margin of between 1.25% and 2.125% for Eurocurrency
Rate Advances. Other advances bear interest as set forth in the Credit
Agreement. The facility also contains certain financial and other
covenants. The Company has agreed to pledge as security certain shares
of certain of its subsidiaries of the Company.
Page 15 of 24
<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, 2000
COMPARED WITH THE THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1999
The following table sets forth certain items as a percentage of revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
(UNAUDITED)
---------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenues 100.0% 100.0%
Cost of sales 60.4 68.3
------- -------
Gross profit 39.6 31.7
Selling and administrative expense 13.6 17.5
Research and development expense 6.0 7.0
------- -------
Operating profit (loss) 20.0 7.2
Net interest income (expense) 2.4 (2.2)
Other income, net 0.1 0.0
------- -------
Income before income taxes, 22.5 5.0
Provision for income taxes 5.6 1.6
------- -------
Net income 16.9% 3.4%
======= =======
</TABLE>
Revenues for the three-month period ended September 30, 2000 increased 63.9% to
$249.4 million from $152.2 million in the year-ago period. Revenues for our new
proprietary products (Power Integrated Circuits, Advanced Circuit Devices, and
Power Systems) led the year-to-year growth in revenue. Revenues for these
products increased 142% year-to-year and accounted for 30% of revenue for the
current quarter. Revenues in the current quarter period included $11.4 million
of net patent royalties, versus $7.4 million in the comparable prior-year
period, reflecting a number of new license agreements and higher shipments of
products covered under existing license agreements.
Product sales by region are based on the location of the customer's
production. For the three months ended September 30, 2000, product sales by
region were approximately 37% from North America, 22% from Europe, 31% from
Asia Pacific, and 10% from Japan, compared to 37%, 25%, 31% and 8%,
respectively, in the prior-year quarter. North American and European sales
increased by 64% and 48%, respectively, over the prior-year quarter largely
due to growth in the automotive and information technology sectors. Asia
Pacific sales grew 65% in the prior year quarter. Such growth was largely due
to the information technology sector. Japan sales increased 117% for the same
time period as a result of growth in the industrial and information
technology sectors.
In the three-month period ended September 30, 2000, gross profit increased to
$98.7 million (39.6% of revenues) from $48.2 million (31.7% of revenues) in the
comparable year-ago
Page 16 of 24
<PAGE>
quarter. The gross margin increase reflected the richer mix of more
proprietary products, cost reductions and higher royalties.
In the three-month period ended September 30, 2000, selling and administrative
expense was $33.8 million (13.6% of revenues) compared to $26.7 million for
fiscal quarter 1999 (17.5% of revenues). A 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 are expected to decrease with rising sales and continuing
cost containment over the near term.
In the three-month period ended September 30, 2000, our research and development
expenditures grew to $15.0 million (6.0% of revenues), compared to $10.6 million
(7.0% of revenues) in the comparable prior-year periods. We expect research and
development expenditures to average approximately 6% to 7% of revenue through
the end of this fiscal year.
With respect to current-quarter activity related to restructuring and severance
charges taken in prior periods, refer to the "Notes to unaudited consolidated
Financial Statements - Note 7. Restructuring and Severance Charges."
Net interest income increased by $9.3 million in the three-month period ended
September 30, 2000 compared to the prior-year period. The current quarter
increase in net interest income compared to prior-year quarter resulted from
interest income generated from our additional cash and short-term investments
due to proceeds from our July convertible debt offering of $550 million and our
common stock offering in March 2000.
Net foreign currency gains and losses were less than $1.0 million in each
three-month period.
Our effective tax rate for the three months ended September 30, 2000 was
approximately 25%, which differs from the U.S. federal statutory tax rate of
35%. The lower effective tax rate reflects foreign tax credits, research and
development credits, state tax credits, and lower valuation allowances, which
are partially offset by higher statutory tax rates in certain foreign
jurisdictions and foreign jurisdiction losses without foreign tax benefit.
Our effective tax rate for the three months ended September 30, 1999 was
approximately 32%, which differs from the U.S. federal statutory tax rate of
35%. The lower effective tax rate was due primarily to lower valuation
allowances, the benefit of foreign tax and research and development credits,
partially offset by higher statutory tax rates and foreign jurisdiction
losses without foreign tax benefit.
SEASONALITY
We experience moderate seasonality in our business. In the last two years it has
been difficult to isolate seasonality due to our high growth rate. In such
periods, the Company's rapid growth has largely overridden the traditional
slowdown associated with the summer-time vacation period. Recent historical
averages are not necessarily indicative of future results.
Page 17 of 24
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, we had cash and cash equivalent balances of $654.5
million and short-term investments of $158.8 million. Our short-term investment
portfolio consists of fixed-income, investment-grade securities with maturities
of no more than 15 months.
During the three-month period ended September 30, 2000, operating activities
generated cash flow of $52.6 million compared to $13.6 million in the
prior-year quarter. Working capital increased by $6.1 million in the quarter
as a result of our revenue growth, and, in addition, we showed improvements
in working capital management. Days of sales outstanding declined by 9 days
compared to the year-ago quarter and inventories dropped by three weeks.
The Company invested $100.9 million in short-term investments and $27.0 million
in capital equipment in the current quarter. Investing activities totaled $129.1
million in this period. At September 30, 2000, we had made purchase commitments
for capital expenditures of approximately $10.1 million. Based on current market
conditions and assumptions, our plan for fiscal 2000 capital expenditures is
approximately $125 million, principally for fabrication and assembly capacity to
meet market demand. We intend to fund capital expenditures and working capital
requirements, through cash and cash equivalents on hand and anticipated cash
flow from operations. Although we believe that our current funding will be
sufficient for normal operating activities, we may also consider the use of
funds from other external sources, including, but not limited to, public or
private offerings of debt or equity.
Financing activities during the quarter generated $535.0 million. On July 13,
2000, we successfully completed a $550 million convertible subordinated notes
offering that generated net proceeds to us of $530 million (net of underwriting
commissions and transaction costs). As of September 30, 2000, we had equipment
and foreign credit facilities of $20.9 million, against which $17.6 million had
been borrowed. For additional information on current financing activities, refer
to the "Notes to Unaudited Consolidated Financial Statements - Note 13.
Subsequent Event."
At September 30, 2000 our cash, cash equivalents, short-term investments and our
unused credit facilities totaled $816.7 million.
Three class action lawsuits have been brought against IR and its Board of
Directors. See "Note 11. Litigation" for further information. Although we
believe that these class action lawsuits are without merit, the ultimate outcome
and the related effect on liquidity thereof cannot be presently determined.
Accordingly, we have not made provision for liability, if any, that may result
upon adjudication of these matters. For the possible effects of environmental
matters on liquidity, see "Notes to Unaudited consolidated financial statements
- Note 9. 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
Page 18 of 24
<PAGE>
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 period of
dual circulation of not to exceed three months.
We have 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 our business or financial
condition. We will continue to evaluate the impact of the euro conversion.
RISK MANAGEMENT
At the end of June 2000, some equipment in one of our wafer fabrication lines
was damaged due to a contractor error. While our facility continues to
operate normally, an inspection is underway to gauge any potential effects on
the equipment and to ensure that any remediation is performed. While we have
experienced no material adverse effect and believe any material losses would
be covered by our insurance, there can be no assurance that the matter would
not have a material and adverse effect on our business, results of operations
or cash flows.
RESTRUCTURING AND SEVERANCE CHARGES
During December 1998, we recorded a $14.5 million restructuring charge
associated with plans to relocate high-volume assembly lines from our facility
in England to our facility in Mexico to take advantage of labor rate savings and
to centralize more of our European customer service and administrative
activities, resulting in reductions in personnel. We have completed this
operational transition. The charge consisted of $5.9 million for estimated
severance costs associated with the elimination of approximately 350 positions,
primarily consisting of 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,
which consist primarily of building improvements relating to the high-volume
assembly production lines and production information systems, remain in use and
all of them have been abandoned. In the third quarter of fiscal 1999, we
recorded a final 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 December
1998 restructuring, as the 43 positions included in the March 1999 restructuring
were primarily relatively highly paid employees in sales and administrative
management. The approximately 350 positions in the December 1999 restructuring
were primarily operators and technicians who on average have a much lower salary
level.
The cost savings from the second and third fiscal 1999 quarter restructuring
activities resulted in annual savings of approximately $5 million in fiscal 2000
and are estimated to result in approximately $13 million annually thereafter.
The savings consist of lower direct
Page 19 of 24
<PAGE>
labor cost, lower factory overhead (including lower depreciation expense),
lower materials costs and lower selling and administrative costs.
As of September 30, 2000, we had eliminated 344 positions, paid $10.1 million
for termination benefits related to this program and recorded the asset
impairment of $8.6 million.
During June 1999, we 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 September 30, 2000, we had eliminated 36 positions and
paid $6.7 million in termination benefits. The remaining unutilized severance
accrual of $1.6 million at September 30, 2000, which is classified as current,
relates to employees who were notified prior to June 30, 2000 of elimination of
their positions.
Page 20 of 24
<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 that 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 our 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
trade and export regulations and policies; 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 actual effects of equipment
damage in our wafer fabrication line described in the section entitled "Risk
Management" above; product returns; changes in customers' order patterns; our
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 to fund capital expenditures from existing credit facilities
or other external sources; the failure of suppliers and subcontractors to meet
their delivery commitments to us; unanticipated impacts on our business or
financial condition due to the euro conversion; unfavorable changes in industry
and competitive conditions; and general economic conditions in our markets
around the world.
Page 21 of 24
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various risks, including changes in interest rates that affect
our return on investments and foreign currency rate fluctuations. We do not hold
or purchase any speculative foreign currency or interest rate contracts.
In the normal course of business, we also face 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
Our financial assets and liabilities that are subject to interest rate risk are
our short-term investments. As of September 30, 2000, a 10% change in interest
rates would not have had a material effect on our results of operations,
financial position or cash flows.
FOREIGN CURRENCY RISK
We conduct business in various parts of the world and in various foreign
currencies. We manage potential foreign currency exposure by entering into
forward foreign exchange contracts or other non-speculative risk management
instruments related to our foreign currency denominated receivables and payables
at certain of our international subsidiaries. The gains and losses on these
contracts are intended to offset changes in the related exposures. We do not
hedge our foreign currency exposure in a manner that would entirely eliminate
the effects of changes in foreign exchange rates on our consolidated net income.
At September 30, 2000, we evaluated the effect that near-term changes in foreign
exchange rates would have had on the fair value of our combined foreign currency
position related to our outstanding foreign currency forward exchange contracts.
If we had experienced an adverse change in foreign exchange rates of as much as
10%, the potential change in our foreign currency position would have had an
immaterial effect on the results of our operations, financial position and cash
flows.
In fiscal 2000, we derived a large portion of our revenues from sales in foreign
markets. The notional value of our foreign currency forward contracts was $38.7
million at September 30, 2000 compared to $37.4 million at June 30, 2000. The
fair market value of our foreign currency forward contracts was less than $0.1
million at September 30, 2000 and $0.5 million at June 30, 2000. Net realized
and unrealized foreign currency transaction gains and losses were less than $1.0
million in the three months ended September 30, 2000.
Page 22 of 24
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. REPORTS ON FORM 8-K AND EXHIBIT
a) The Company filed a report on Form 8-K on October 10,
2000 relating to "Other Events" regarding an agreement
of the parties on September 27, 2000 in the three class
action lawsuits filed in Fedaral District Court for the
Central District of California in 1991, subject to court
approval, to continue the trial date from October 3,
2000 to December 4, 2000.
b) Exhibit No. 10(aj) Credit Agreement dated as of
November 2, 2000 among
International Rectifier
Corporation, and the initial
lenders named therein, BNP Paribas,
as sole arranger, administrative
agent and initial issuing bank.
Exhibit No. 10(ak) Form of Security Agreement, dated
as of November 2, 2000, entered
into by and between the grantors
named therein and BNP Paribas, as
agent, in connection with Credit
Agreement, dated as of November 2,
2000.
c) Exhibit No. 12.1 Statement regarding computation
of ratio of earnings to fixed
charges.
Page 23 of 24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL RECTIFIER CORPORATION
-----------------------------------
REGISTRANT
November 14, 2000 MICHAEL P. MCGEE
------------------------------
Michael P. McGee
Executive Vice President,
Chief Financial Officer and
Principal Accounting Officer
Page 24 of 24