<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 MARCH 31, 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 61,437,753 SHARES OF THE REGISTRANT'S COMMON STOCK, PAR VALUE $1.00
PER SHARE, OUTSTANDING ON MAY 05, 2000.
1
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE
ITEM 1. FINANCIAL STATEMENTS REFERENCE
Unaudited Consolidated Statement of
Income for the Three- and Nine-Month Periods
Ended March 31, 2000 and 1999 3
Unaudited Consolidated Statement of Comprehensive
Income for the Three- and Nine-Month Periods
Ended March 31, 2000 and 1999 4
Consolidated Balance Sheet as of
March 31, 2000 (unaudited) and
June 30, 1999 5
Unaudited Consolidated Statement of
Cash Flows for the Nine-Month
Periods Ended March 31, 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 24
PART II. OTHER INFORMATION
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(RESTATED)
<S> <C> <C> <C> <C>
Revenues $197,959 $137,550 $521,296 $397,880
Cost of sales 125,530 97,669 342,446 285,636
----------- ----------- ----------- -----------
Gross profit 72,429 39,881 178,850 112,244
Selling and administrative expense 28,816 24,575 82,556 73,180
Research and development expense 11,795 10,147 33,455 30,565
Restructuring charge - 4,200 - 16,200
----------- ----------- ----------- -----------
Operating profit (loss) 31,818 959 62,839 (7,701)
Other income (expense):
Interest, net (2,138) (2,855) (9,458) (8,211)
Other, net 475 7,954 1,075 52,301
----------- ----------- ----------- -----------
Income before income taxes,
extraordinary charge and cumulative
effect of accounting change 30,155 6,058 54,456 36,389
Provision for income taxes 8,460 2,054 15,248 12,557
----------- ----------- ----------- -----------
Income before extraordinary charge and
cumulative effect of accounting change 21,695 4,004 39,208 23,832
Extraordinary charge for early extinguishment
of debt, net of income tax benefit of $1,856 (4,772) - (4,772) -
Cumulative effect of accounting change,
net of income tax benefit of $5,431 - - - (26,154)
----------- ----------- ----------- -----------
Net income (loss) $ 16,923 $ 4,004 $ 34,436 $ (2,322)
=========== =========== =========== ===========
Net income per common share - Basic:
Income before extraordinary charge and
cumulative effect of accounting change $ 0.40 $ 0.08 $ 0.75 $ 0.46
Effect of extraordinary charge (0.09) - (0.10) -
Cumulative effect of accounting change - - - (0.50)
----------- ----------- ----------- -----------
Net income (loss) per common share -
Basic $ 0.31 $ 0.08 $ 0.65 $ (0.04)
=========== =========== =========== ===========
Net income per common share - Diluted:
Income before extraordinary charge and
cumulative effect of accounting change $ 0.38 $ 0.08 $ 0.71 $ 0.46
Effect of extraordinary charge (0.09) - (0.08) -
Cumulative effect of accounting change - - - (0.50)
----------- ----------- ----------- -----------
Net income (loss) per common share -
Diluted $ 0.29 $ 0.08 $ 0.63 $ (0.04)
=========== =========== =========== ===========
Average common shares and potentially
dilutive securities outstanding
Basic 53,808 51,681 52,585 51,576
=========== =========== =========== ===========
Diluted 57,742 51,802 54,977 51,671
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- -----------------------------
2000 1999 2000 1999
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) $16,923 $ 4,004 $34,436 $(2,322)
Other comprehensive income (loss),
net of tax effect:
Foreign currency translation
adjustments (1,465) (1,698) (426) 279
---------- ----------- ----------- -----------
Comprehensive income (loss) $15,458 $ 2,306 $34,010 $(2,043)
=========== =========== ============ ===========
Related deferred tax expense (benefit) $ (409) $ (18) $ (119) $ 684
=========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
MARCH 31,
2000 JUNE 30,
(UNAUDITED) 1999
----------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $203,353 $ 31,497
Short-term investments 5,000 8,900
Trade accounts receivable, net 173,368 121,659
Inventories 118,761 108,463
Deferred income taxes 14,564 16,078
Prepaid expenses and other receivables 19,355 19,677
----------------- --------------
Total current assets 534,401 306,274
Property, plant and equipment, net 385,053 380,504
Other assets 38,959 22,307
----------------- --------------
Total assets $958,413 $709,085
================= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank loans $ 13,594 $ 14,996
Long-term debt, due within one year 1,864 8,047
Accounts payable 69,076 64,809
Accrued salaries, wages and commissions 19,569 19,546
Other accrued expenses 37,866 33,234
----------------- --------------
Total current liabilities 141,969 140,632
Long-term debt, less current maturities 5,275 158,418
Other long-term liabilities 6,316 7,142
Deferred income taxes 5,103 6,619
Stockholders' equity:
Common stock 62,716 51,781
Capital contributed in excess of par value 616,277 257,746
Retained earnings 127,304 92,868
Accumulated other comprehensive loss (6,547) (6,121)
----------------- --------------
Total stockholders' equity 799,750 396,274
----------------- --------------
Total liabilities and stockholders' equity $958,413 $709,085
================= ==============
</TABLE>
The accompanying notes are an integral part of this statement.
5
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
----------------------------------
2000 1999
------------- -------------
(restated)
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $ 34,436 $ (2,322)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 41,191 35,818
Deferred income (350) (450)
Deferred income taxes (2) 244
Deferred compensation (77) (6,777)
Restructuring charge - 18,700
Extraordinary charge 4,772 -
Cumulative effect of change in accounting principle - 26,154
Change in working capital (44,313) 26,093
------------- -------------
Net cash provided by operating activities 35,657 97,460
------------- -------------
Cash flow from investing activities:
Additions to property, plant and equipment (42,809) (55,541)
Proceeds from sale of property, plant & equipment 4,661 -
Acquisition of business, net of cash & cash equivalents (28,500) -
Purchase of short-term investments - (12,900)
Proceeds from sale of short-term investments 3,900 17,232
Change in other noncurrent assets (2,758) 7,587
------------- -------------
Net cash used in investing activities (65,506) (43,622)
------------- -------------
Cash flow from financing activities:
Net proceeds (repayments) of debt (161,139) 25,958
Payments on long-term debt and obligations
under capital leases (3,602) (51,491)
Net proceeds from issuance of common stock 361,662 -
Proceeds from exercise of stock options 4,062 2,470
Other 369 (1,391)
------------- -------------
Net cash provided by (used in) financing activities 201,352 (24,454)
------------- -------------
Effect of exchange rate changes on cash and
cash equivalents 353 557
------------- -------------
Net increase in cash and cash equivalents 171,856 29,941
Cash and cash equivalents, beginning of period 31,497 32,294
------------- -------------
Cash and cash equivalents, end of period $ 203,353 $ 62,235
============= =============
</TABLE>
The accompanying notes are an integral part of this statement.
6
<PAGE>
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of the
Company, its majority-owned subsidiaries, and its wholly owned subsidiary
Zing Technologies, Inc. ("Zing"), and Zing's wholly owned subsidiary and
sole operating business, Omnirel LLC ("Omnirel"). All significant
intercompany transactions, balances and profits have been eliminated in
consolidation. The consolidation includes Zing from March 8, 2000.
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 March 31, 2000 and the consolidated
results of operations and cash flows for the nine-month periods ended
March 31, 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 nine-month
period ended March 31, 2000 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 fiscal
year ended June 30, 1999.
The Company operates on a fiscal calendar under which the nine months
ended March 31, 2000 and 1999 consisted of 39 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 treasury stock
method is used to calculate the dilutive shares which 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- and nine-month periods ended March 31, 2000 and 1999 (in thousands
except per share amounts):
7
<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 March 31, 2000
Net income per common share - Basic $16,923 53,808 $ 0.31
Effect of dilutive securities:
Stock options.................................... - 3,934 -
-----------------------------------------------------------
Net income per common share - Diluted $ 16,923 57,742 $0.29
===========================================================
Net Income Shares Per Share
(Numerator) (Denominator) Amount
------------- ------------- -----------
Three Months ended March 31, 1999
Net income per common share - Basic $ 4,004 51,681 $ 0.08
Effect of dilutive securities:
Stock options.................................... - 121 -
-----------------------------------------------------------
Net income per common share - Diluted $ 4,004 51,802 $ 0.08
===========================================================
Net Income Shares Per Share
(Numerator) (Denominator) Amount
------------- ------------- -----------
Nine Months ended March 31, 2000
Net income per common share - Basic $34,436 52,585 $ 0.65
Effect of dilutive securities:
Stock options.................................... - 2,392 -
-----------------------------------------------------------
Net income per common share - Diluted $34,436 54,977 $ 0.63
===========================================================
Net Income Shares Per Share
(Numerator) (Denominator) Amount
------------- ------------- -----------
Nine Months ended March 31, 1999
Net loss per common share - Basic $(2,322) 51,576 $(0.04)
Effect of dilutive securities:
Stock options.................................... - 95 -
-----------------------------------------------------------
Net loss per common share - Diluted $ (2,322) 51,671 $(0.04)
===========================================================
</TABLE>
3. INVENTORIES
Inventories are stated at the lower of cost (principally first-in,
first-out) or market. Inventories at March 31, 2000 and June 30, 1999
(audited) were comprised of the following (in thousands):
MARCH 31, 2000 JUNE 30, 1999
-------------- -------------
Raw materials $ 17,569 $ 15,277
Work-in-process 56,857 52,124
Finished goods 44,335 41,062
-------------- -------------
$118,761 $108,463
============== =============
8
<PAGE>
4. LONG-TERM DEBT AND OTHER LOANS
A summary of the Company's long-term debt and other loans at March 31,
2000 is as follows (in thousands):
<TABLE>
<S> <C>
Capitalized lease obligations payable in varying monthly
installments primarily at rates from 6.3% to 8.2%, due in
2002 though 2004 $ 4,640
Foreign bank loans collateralized by property and/or equipment,
payable in varying monthly installments at 10.8%, due in 2000 100
Foreign unsecured bank loans payable in varying monthly
installments at rates from 4.3% to 8.4%, due in 2003
through 2006 2,399
--------
Debt, including current portion of long-term debt of $1,864 7,139
Foreign unsecured revolving bank loans at rates from 1.5% to 8.5% 13,594
--------
Total Debt $20,733
========
</TABLE>
In the quarter ended March 31, 2000, the Company successfully
completed an offering of 9,250,000 shares of common stock, of which
8,850,000 shares were sold by the Company, that generated net proceeds
to the Company of $361.7 million (net of $1.7 million of transaction
costs and $17.9 million of underwriting discount). The remaining
400,000 shares were sold by a stockholder. A portion of the Company's
proceeds was used to pay off outstanding loans, accrued interest and
penalties under the Company's syndicated Credit Agreement with Banque
Nationale de Paris in the amount of $192.3 million. The remaining
proceeds will be used for general corporate purposes, including capital
expenditures and possible acquisitions. As a result of this early
extinguishment of debt, the Company incurred an extraordinary charge
of $6.6 million ($4.8 million net of tax).
5. RESTRUCTURING AND SEVERANCE CHARGES
During the second quarter of fiscal 1999, the Company recorded a $14.5
million restructuring charge associated with plans to relocate
high-volume assembly lines from its facility in England to its facility
in Mexico to take advantage of labor rate savings, to centralize more of
its European customer service and administrative activities, and to
reduce personnel. The Company expects to complete this operational
transition by 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
9
<PAGE>
5. RESTRUCTURING AND SEVERANCE CHARGES (CON'T)
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 as compared to the second-quarter fiscal 1999
restructuring, because 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 March 31, 2000, the Company had eliminated 114 positions, paid $6.2
million for termination benefits related to this program and recorded the
asset impairment of $8.6 million. The remaining unutilized restructuring
accrual of $3.9 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 three
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 March 31, 2000, the Company had eliminated 25 positions
and paid $5.1 million in termination benefits. The remaining unutilized
severance accrual of $3.2 million at March 31, 2000, 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 three months.
10
<PAGE>
6. GEOGRAPHICAL INFORMATION
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 131 in fiscal 1999. The Company's business is in one operating
segment. Revenues from unaffiliated customers are based on the location
in which the sale originated. Geographic information for 2000 and 1999 is
presented below (000's):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES FROM UNAFFILIATED CUSTOMERS
Great Britain............................ $ 26,086 $ 17,795 $ 64,056 $ 56,487
Singapore................................ 33,931 21,422 91,298 58,321
Other Foreign............................ 56,637 32,804 146,013 91,355
--------------------------------------------------------------------
Subtotal - Foreign................... 116,654 72,021 301,367 206,163
United States............................ 71,105 58,130 194,617 173,172
Unallocated royalties.................... 10,200 7,399 25,312 18,545
--------------------------------------------------------------------
Total................................ $197,959 $137,550 $521,296 $397,880
====================================================================
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 1999
---------- ----------
<S> <C> <C>
IDENTIFIABLE ASSETS
Great Britain.......................................... $ 76,849 $103,002
Singapore.............................................. 75,129 62,625
Other Foreign.......................................... 77,129 32,549
------------------------------------
Subtotal - Foreign................................. 229,107 198,176
United States.......................................... 465,122 482,636
Corporate assets....................................... 264,184 28,273
------------------------------------
Total.............................................. $958,413 $709,085
====================================
</TABLE>
Corporate assets consist of cash, short-term investments, royalties
receivable, inventory reserves, deferred taxes and certain other assets.
One distributor accounted for 11% of the Company's consolidated net
revenues in the nine months ended March 31, 2000. The same distributor
accounted for 10.9% and 11.6% of the Company's consolidated net revenues
in the three months ended March 31, 2000 and 1999, respectively. No other
single customer accounted for more than 10% of the Company's consolidated
net revenues in the nine months ended March 31, 1999.
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
11
<PAGE>
7. ENVIRONMENTAL MATTERS (CON'T)
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 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
against it 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 (but 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 has received a request from the EPA 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
12
<PAGE>
7. ENVIRONMENTAL MATTERS (CON'T)
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 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
The PTO has recently issued a Notice of Intent to Issue Reexamination
Certificate confirming the patentability of all claims of the Company's
U.S. Patent No. 5,008,725. The Company's related U.S. Patent No.
5,130,767 is the sole remaining power MOSFET patent 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 certain of the Company's
U.S. patents. The suit sought damages and customary relief in such
matters. On April 6, 2000, the Company entered into a worldwide
royalty-bearing license agreement with ON Semiconductor covering certain
patents. The license agreement is effective as of January 1, 2000, and
settles all pending litigation between the two parties.
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's and the individual
defendants' motion for summary judgment, issued the following orders: (a)
the motion for summary judgment was
13
<PAGE>
9. LITIGATION (CON'T)
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.
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 June 27,
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 nine months ended March 31, 2000
was approximately 28%, 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 a decrease in
valuation allowances.
The Company's effective tax rate for the nine months ended March 31, 1999
was approximately 34.5%, which differs from the U.S. federal statutory
tax rate of 35%. The lower effective tax rate reflects an increase in
valuation allowances, higher statutory tax rates in certain foreign
jurisdictions and foreign jurisdiction losses without foreign tax
benefit, more than offset by foreign tax credits, research and
development credits and state tax credits.
11. INTEREST RATE SWAP AGREEMENT
Under the Company's Credit Agreement with Banque Nationale de Paris
entered into on June 30, 1999, the Company was required to hedge the
interest rate for at least half of the outstanding term loans under the
agreement. The Company entered into interest rate swap agreements to
hedge approximately 50% of these outstanding term loans. In March 2000,
the Company paid off all outstanding loans and sold all of its unexpired
interest rate swap agreements, resulting in a nominal gain.
14
<PAGE>
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 results for the nine months ending March 31,
1999 have been restated to reflect the above charge.
13. ACQUISITION
On January 28, 2000, the Company and Zing announced that the Company
agreed to acquire all the outstanding shares of Zing, and its wholly
owned subsidiary and sole operating business, Omnirel, for a cash
purchase price of $15.36 per share. Omnirel manufactures and sells high
reliability multi-chip power semiconductor products for the military, and
for industrial and high-end commercial markets. The acquisition was
accounted for under the purchase method of accounting, and the
consolidated financial results of Zing were included in the Company's
consolidated financial statements from the date of acquisition. The
purchase price (net of Zing's cash) for the transaction was approximately
$28.5 million. The tender offer for the outstanding shares of Zing
expired on March 6, 2000, with approximately 96% of the outstanding
shares of Zing having been tendered, and the Company's acquisition of the
tendered shares closed on March 8, 2000. On March 16, 2000, the Company
completed its acquisition by merger between the Company's acquisition
subsidiary and Zing. Pursuant to that merger, the approximately 4% of
outstanding shares remaining were converted into the right to receive
$15.36 per share from the Company, subject to any dissenter's rights
under applicable law. As of May 12, 2000, the Company had not received
any notice of election of dissenter's rights for any shares and less than
approximately 10,000 former shares had not been surrendered for payment.
Total consideration exceeded the fair value of the net tangible assets
acquired by $16.0 million, of which $3.3 million has been recorded as
goodwill and $12.7 million has been allocated to other intangibles
consisting of assembled workforce, trade name, complete technology and
customer base. The purchase price has been preliminarily allocated based
on estimated fair values at the date of acquisition, pending final
determination of certain balances. The goodwill and the other intangibles
are being amortized on a straight-line basis over periods ranging from 10
to 15 years.
Net sales since the acquisition date of Zing for the fiscal quarter ended
March 31, 2000 were approximately $1.7 million. Assuming this acquisition
had occurred July 1, 1998, consolidated proforma net sales, income and
earnings per share would not have been materially different from the
reported amounts for the fiscal years 1999 and 2000.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE- AND NINE-MONTH PERIODS ENDED MARCH 31, 2000
COMPARED WITH THE THREE- AND NINE-MONTH PERIODS ENDED MARCH 31, 1999
The following table sets forth certain items as a percentage of revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
(UNAUDITED) (UNAUDITED)
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(RESTATED)
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 63.4 71.0 65.7 71.8
------------ ------------ ------------ ------------
Gross profit 36.6 29.0 34.3 28.2
Selling and administrative expense 14.5 17.9 15.8 18.4
Research and development expense 6.0 7.4 6.4 7.7
Restructuring charge - 3.1 - 4.1
------------ ------------ ------------ ------------
Operating profit (loss) 16.1 0.6 12.1 (2.0)
Interest expense, net (1.1) (2.1) (1.9) (2.1)
Other income, net 0.2 5.8 0.2 13.1
------------ ------------ ------------ ------------
Income before income taxes,
extraordinary charge 15.2 4.3 10.4 9.0
Provision for income taxes 4.3 1.4 2.9 3.0
------------ ------------ ------------ ------------
Income before extraordinary charge and
cumulative effect of accounting change 10.9 2.9 7.5 6.0
Extraordinary charge on early
extinguishment of debt 2.4 - 0.9 -
Cumulative effect of accounting
change - - - (6.6)
------------ ------------ ------------ ------------
Net income (loss) 8.5% 2.9% 6.6% (0.6)%
============ ============ ============ ============
</TABLE>
Revenues for the three-month period ended March 31, 2000 increased 43.9% to
$197.9 million from $137.6 million in the year-ago period. The current quarter
includes $1.7 million of revenue from Zing Technologies, Inc. ("Zing"), and its
wholly owned subsidiary and sole operating business, Omnirel LLC ("Omnirel"),
which the Company acquired in March. Revenues for the nine-month period ended
March 31, 2000 increased 31.0% to $521.3 million from $397.9 million in the
year-ago period. The revenue growth was led by year to year and sequential
growth in the Company's new proprietary products. Revenues in the nine-month
period included $25.3 million of net patent royalties, versus $18.5 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 March 31,
2000 and 1999 were $10.2 million and $7.4 million, respectively.
16
<PAGE>
Product sales by region are based on the location of the customer's production.
For the three months ended March 31, 2000, product sales by region (excluding
the contribution of Zing) were approximately 34% from North America, 25% from
Europe and 41% from Asia (which includes Japan and Asia Pacific), compared to
43%, 22% and 35%, respectively, in the prior-year quarter. For the nine months
ended March 31, 2000, revenues (excluding the contribution of Zing) were
approximately 35% from North America, 25% from Europe and 40% from Asia,
compared to 42%, 24% and 34%, respectively, in the prior-year period. Revenue in
Asia Pacific grew 58% over the prior-year nine months period, reflecting the
continued move of American and European manufacturing activities to this region
as well as strong demand in all sectors. Europe grew by over 32% for the same
period, partly attributed to continuing strength in the automotive and cellular
phone industries. North American sales increased by 10% over the prior-year
nine-month period in part due to growth in the automotive, cellular phone and
portable computer industries.
March-quarter 2000, gross profit increased to $72.4 million (36.6% of revenues)
from $39.8 million (29.0% of revenues) in the comparable year-ago quarter. Gross
profit for the nine-month period ended March 31, 2000 increased to $178.9
million (34.3% of revenues) from $112.2 million (28.2% of revenues) in the
year-ago period. The gross margin increase reflected a higher proportion of
revenue from proprietary products, increased royalty income 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 nine-month period ended
March 31, 1999 was 28.8% of revenue. See "Notes to Unaudited Consolidated
Financial Statements - Note 5. Restructuring and Severance Charges."
In the three- and nine-month periods ended March 31, 2000, selling and
administrative expense was $28.8 million and $82.6 million (14.5% and 15.8% of
revenues), respectively, versus $24.6 million and $73.1 million (17.9% and 18.4%
of revenues) in the comparable year-ago periods. 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
over the near term.
In the three- and nine-month periods ended March 31, 2000, the Company's
research and development expenditures increased to $11.8 million and $33.4
million (6.0% and 6.4% of revenues), respectively, compared to $10.1 million and
$30.6 million (7.4% and 7.7% of revenues) in the comparable prior-year periods.
In the nine-month period ended March 31, 2000, the Company increased research
and development expenditures by $2.9 million versus the prior year nine-month
period 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 the "Notes to Unaudited Consolidated
Financial Statements - Note 5. Restructuring and Severance Charges."
Other income was $1.1 million in the first nine months of fiscal 2000 versus
other income of $52.3 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 settlements 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
17
<PAGE>
payable to Unitrode Corporation. During the third quarter of fiscal 1999, the
Company recorded a $7.6 million pretax benefit related to a new patent license
agreement.
Net interest expense decreased by $0.7 million in the three-month period ended
March 31, 2000 compared to the prior-year period. The current quarter decrease
in net interest expense is due to the payoff of all but $20.7 million of the
Company's debt on March 16, 2000 with a portion of the proceeds from the
Company's common stock offering, as well as additional interest income earned on
the investment of the remaining proceeds. Net interest expense increased by $1.2
million in the nine-month period ended March 31, 2000 versus the prior-year
period. This increase reflected higher interest rates on the credit agreement
entered into in the last quarter of fiscal 1999 versus the interest rates on the
Company's debt outstanding in the first nine months of fiscal 1999.
Net foreign currency gains and losses were less than $1.0 million in each
nine-month period.
The Company's effective tax rate for the nine months ended March 31, 2000 was
approximately 28%, 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 a decrease in valuation allowances.
The Company's effective tax rate for the nine months ended March 31, 1999 was
approximately 34.5%, which differs from the U.S. federal statutory tax rate
of 35%. The lower effective tax rate reflects an increase in valuation
allowances, higher statutory tax rates in certain foreign jurisdictions and
foreign jurisdiction losses without foreign tax benefit, more than offset by
foreign tax credits, research and development credits and state tax credits.
In the quarter ended March 31, 2000, the Company incurred an extraordinary
charge of $6.6 million ($4.8 million net of tax) on the early extinguishment of
debt as a result of the early payoff of outstanding loans, accrued interest and
penalties ($192.3 million) under the Credit Agreement with Banque Nationale de
Paris.
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. Therefore, the
nine months ending March 31, 1999 have been restated to reflect the above
charge.
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 March 31, 2000, the Company had cash and cash equivalent balances of $203.4
million and short term investments of $5.0 million. During the nine-month period
ended March 31, 2000, operating activities generated cash flow of $35.7 million.
18
<PAGE>
Net investing activities consumed $65.5 million, primarily due to capital
expenditures of $42.8 million and the acquisition of Zing, offset in part by the
liquidation of short-term investments and the sale of certain assets. At March
31, 2000, the Company had made purchase commitments for capital expenditures of
approximately $21.9 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 and working capital requirements,
through cash and cash equivalents on hand and anticipated cash flow from
operations. Although the Company believes that its current funding will be
sufficient for normal operating activities, 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 provided by financing activities amounted to $201.4 million. In the
quarter ended March 31, 2000, the Company successfully completed an offering
of 9,250,000 shares of common stock, of which 8,850,000 shares were sold by
the Company, that generated net proceeds to the Company of $361.7 million
(net of $1.7 million of transaction costs and $17.9 million of underwriting
discount). The remaining 400,000 shares were sold by a stockholder. A portion
of the proceeds was used to pay off the outstanding loans, accrued interest
and penalties under the Company's syndicated Credit Agreement with Banque
Nationale de Paris in the amount of $192.3 million. The remaining proceeds
will be used for general corporate purposes, including capital expenditures
and possible acquisitions. The Company also has $18.9 million in foreign
revolving lines of credit, against which $13.6 million had been borrowed.
Foreign term loan facilities of $2.4 million and domestic equipment financing
facilities of $4.6 million were both fully utilized. As of March 31, 2000,
the Company had credit facilities of $26 million, against which $20.7 million
had been borrowed.
Based on cash and cash equivalents on hand and its unused credit facilities, at
March 31, 2000, the Company's liquidity was $213.7 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 "Notes to Unaudited
Consolidated Financial Statements - 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 period of dual
circulation of not to exceed three months.
The Company has initiated an internal analysis to determine the effects of the
January 1, 2002 conversion. The current assessment includes the potential impact
of the technical challenges to adapt information technology and other systems to
accommodate euro-
19
<PAGE>
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 by 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 as compared to the second-quarter fiscal
1999 restructuring because 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 March 31, 2000, the Company had eliminated 114 positions, paid $6.2
million for termination benefits related to this program and recorded the asset
impairment of $8.6 million. The remaining unutilized restructuring accrual of
$3.9 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 three 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 March 31, 2000,
the Company had eliminated 25 positions and paid $5.1 million in termination
benefits. The remaining unutilized severance accrual of $3.2 million at March
31, 2000, 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 three months.
20
<PAGE>
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 and amortizing them over the life of
the related asset following the start-up of each new process. The early adoption
of SOP 98-5 was required to be made retroactive to the beginning of the first
quarter of 1999. The cumulative effect of this change in accounting principle,
net of income tax benefit 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.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB 101"). SAB
101 summarized certain areas of the Staff's views in applying generally accepted
accounting principles to revenue in financial statements. The Company is
required to apply the accounting and disclosures described in SAB 101 during the
first quarter of fiscal 2001. The Company is currently evaluating the impact of
SAB 101 on its revenue recognition policy.
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.
We have adopted the definition of Year 2000 conformity published by the British
Standards Institute ("BSI") as DISC PD2000-1. Currently, none of our products
contain date processing
21
<PAGE>
logic. We, therefore, believe that our products are Year 2000 compliant pursuant
to the BSI DISC PD2000-1 definition.
Our Global Year 2000 Team was formed to manage and coordinate company-wide Year
2000 initiatives, while local site teams addressed research and remediation for
site-specific equipment, facilities and suppliers. The cost of investigation and
remediation for the period August 1997 through March 2000 was $7.7 million. The
amount includes staff compensation and remediation expenses.
We have successfully completed the verification process for all internal
information systems, factory equipment, facilities, suppliers and business
partners. To date, we have not experienced any business interruptions due to any
Year 2000 related cause and have concluded all of our planned investigation and
remediation related to the Year 2000 issue.
Furthermore, we have 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, we do not believe that the Year 2000
matters discussed above will have a material adverse impact on our financial
condition, liquidity, or results of operations. We cannot assure you that our
compliance efforts and contingency plans will adequately address every issue
that may arise in the year 2000. The costs of our Year 2000 remediation reflect
our best estimates, which were based on assumptions of future events, including
the continued availability of certain resources, third-party compliance and
other factors. We cannot assure you that these estimates will be achieved, and
actual results could differ materially from those anticipated.
This disclosure is a Year 2000 statement and constitutes 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
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; 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
22
<PAGE>
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 internal 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; 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. For further
information, refer to "Risk Factors," in the Company's Registration Statement on
Form S-3, filed with the Securities and Exchange Commission on March 7, 2000.
23
<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 equipment
financing facilities as of March 31, 2000. See "Notes to Unaudited Consolidated
Financial Statements - Note 4. Long-Term Debt and Other Loans".
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 March 31, 2000, 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 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.
In the nine months ended March 31, 2000, the Company derived a large portion of
its revenues from sales in foreign markets. The fair market value of the
Company's foreign currency forward contracts was $33.0 million at March 31,
2000, compared to $43.9 at June 30, 1999. This decrease is due primarily to the
sale of certain foreign currency forward contracts. Net realized and unrealized
foreign currency gains and losses were less that $1 million in the nine months
ended March 31, 2000 and 1999.
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
May 15, 2000 MICHAEL P. MCGEE
----------------------------
Michael P. McGee
Executive Vice President,
Chief Financial Officer and
Principal Accounting Officer
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-02-2000
<PERIOD-START> JAN-02-2000
<PERIOD-END> APR-02-2000
<CASH> 203,353
<SECURITIES> 5,000
<RECEIVABLES> 178,034
<ALLOWANCES> 4,666
<INVENTORY> 118,761
<CURRENT-ASSETS> 534,401
<PP&E> 657,613
<DEPRECIATION> 272,560
<TOTAL-ASSETS> 958,413
<CURRENT-LIABILITIES> 141,969
<BONDS> 0
0
0
<COMMON> 62,716
<OTHER-SE> 737,034
<TOTAL-LIABILITY-AND-EQUITY> 958,413
<SALES> 197,959
<TOTAL-REVENUES> 197,959
<CGS> 125,530
<TOTAL-COSTS> 125,530
<OTHER-EXPENSES> 50,561
<LOSS-PROVISION> 50
<INTEREST-EXPENSE> 2,138
<INCOME-PRETAX> 30,155
<INCOME-TAX> 8,460
<INCOME-CONTINUING> 21,695
<DISCONTINUED> 0
<EXTRAORDINARY> 4,772
<CHANGES> 0
<NET-INCOME> 16,923
<EPS-BASIC> 0.31
<EPS-DILUTED> 0.29
</TABLE>
