-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BAXH3yfTcNZWKVgKiuAd7c9uqDWvA7GY61gUj3XhmgzyST+ydptXulYBTfa+PGCz bxIe1NAePjj1SaG5nurVww== 0000912057-00-003780.txt : 20000204 0000912057-00-003780.hdr.sgml : 20000204 ACCESSION NUMBER: 0000912057-00-003780 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000203 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNATIONAL RECTIFIER CORP /DE/ CENTRAL INDEX KEY: 0000316793 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 951528961 STATE OF INCORPORATION: DE FISCAL YEAR END: 0629 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07935 FILM NUMBER: 522885 BUSINESS ADDRESS: STREET 1: 233 KANSAS ST CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3103223331 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999 ------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO --------------------- ------------------------- COMMISSION FILE NO. 1-7935 ---------------------------------------------------------------- INTERNATIONAL RECTIFIER CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-1528961 - ------------------------ ---------------------- (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION INCORPORATION OR ORGANIZATION) NUMBER) 233 KANSAS STREET EL SEGUNDO, CALIFORNIA 90245 - -------------------------- ------------------------ (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 726-8000 NO CHANGE - ------------------------------------------------------------------------------- (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO -- -- THERE WERE 52,222,118 SHARES OF THE REGISTRANT'S COMMON STOCK, PAR VALUE $1.00 PER SHARE, OUTSTANDING ON FEBRUARY 1, 2000. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION
PAGE ITEM 1. FINANCIAL STATEMENTS REFERENCE Unaudited Consolidated Statement of Income for the Three- and Six-Month Periods Ended December 31, 1999 and 1998 2 Unaudited Consolidated Statement of Comprehensive Income for the Three- and Six-Month Periods Ended December 31, 1999 and 1998 3 Consolidated Balance Sheet as of December 31, 1999 (unaudited) and June 30, 1999 4 Unaudited Consolidated Statement of Cash Flows for the Six-Month Periods Ended December 31, 1999 and 1998 5 Notes to Unaudited Consolidated Financial Statements 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14 ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ON MARKET RISK 21 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 24
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, 1999 1998 1999 1998 ------------- ----------- ------------ -------------- (RESTATED) Revenues $171,098 $132,837 $323,337 $260,330 Cost of sales 112,896 96,684 216,916 187,967 ----------- ----------- ----------- ----------- Gross profit 58,202 36,153 106,421 72,363 Selling and administrative expense 27,084 24,398 53,740 48,605 Research and development expense 11,064 10,397 21,660 20,418 Restructuring charge - 12,000 - 12,000 ----------- ----------- ----------- ----------- Operating profit (loss) 20,054 (10,642) 31,021 (8,660) Other income (expense): Interest, net (3,895) (2,905) (7,320) (5,356) Other, net 600 43,829 600 44,347 ----------- ----------- ----------- ----------- Income before income taxes and cumulative effect of accounting change 16,759 30,282 24,301 30,331 Provision for income taxes 4,375 10,488 6,788 10,503 ----------- ----------- ----------- ----------- Income before cumulative effect of accounting change 12,384 19,794 17,513 19,828 Cumulative effect of change in accounting principle, net of income tax benefit of $5,431 - - - (26,154) ----------- ----------- ----------- ----------- Net income (loss) $ 12,384 $ 19,794 $ 17,513 $ (6,326) =========== =========== =========== =========== Net income (loss) per common share - Basic: Income before cumulative effect of accounting change $ 0.24 $ 0.38 $ 0.34 $ 0.38 Cumulative effect of change in accounting principle - - - (0.50) ----------- ----------- ----------- ----------- Net income (loss) per common share - Basic $ 0.24 $ 0.38 $ 0.34 $ (0.12) =========== =========== =========== =========== Net income (loss) per common share - Diluted: Income before cumulative effect of accounting change $ 0.23 $ 0.38 $ 0.33 $ 0.38 Cumulative effect of change in accounting principle - - - (0.50) ----------- ----------- ----------- ----------- Net income (loss) per common share - Diluted $ 0.23 $ 0.38 $ 0.33 $ (0.12) =========== =========== =========== =========== Average common shares and potentially dilutive securities outstanding Basic 52,020 51,532 51,974 51,523 =========== =========== =========== =========== Diluted 54,093 51,691 53,594 51,605 =========== =========== =========== ===========
The accompanying notes are an integral part of this statement. 2 INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, 1999 1998 1999 1998 ---------- ----------- ----------- ----------- (RESTATED) Net income (loss) $12,384 $19,794 $17,513 $(6,326) Other comprehensive income (loss), net of tax effect: Foreign currency translation adjustments (659) (53) 1,039 1,977 ---------- ----------- ----------- ----------- Comprehensive income (loss) $11,725 $19,741 $18,552 $(4,349) =========== =========== =========== =========== Related deferred tax expense (benefit) $ (184) $ (18) $ 290 $ 684 =========== =========== =========== ===========
The accompanying notes are an integral part of this statement. 3 INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In thousands)
DECEMBER 31, 1999 JUNE 30, (UNAUDITED) 1999 --------------- ------------- ASSETS Current assets: Cash and cash equivalents $ 30,028 $ 31,497 Short-term investments - 8,900 Trade accounts receivable, net 145,804 121,659 Inventories 110,239 108,463 Deferred income taxes 15,069 16,078 Prepaid expenses and other receivables 15,407 19,677 -------- --------- Total current assets 316,547 306,274 Property, plant and equipment, net 377,920 380,504 Other assets 24,422 22,307 -------- --------- Total assets $718,889 $709,085 ======== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Bank loans $ 13,536 $ 14,996 Long-term debt, due within one year 7,904 8,047 Accounts payable 63,810 64,809 Accrued salaries, wages and commissions 17,444 19,546 Other accrued expenses 33,562 33,234 -------- --------- Total current liabilities 136,256 140,632 Long-term debt, less current maturities 152,620 158,418 Other long-term liabilities 6,719 7,142 Deferred income taxes 5,608 6,619 Stockholders' equity: Common stock 52,061 51,781 Capital contributed in excess of par value 260,326 257,746 Retained earnings 110,381 92,868 Accumulated other comprehensive loss (5,082) (6,121) -------- --------- Total stockholders' equity 417,686 396,274 -------- --------- Total liabilities and stockholders' equity $718,889 $709,085 ======== =========
The accompanying notes are an integral part of this statement. 4 INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands)
SIX MONTHS ENDED DECEMBER 31, 1999 1998 ---------- -------- (RESTATED) Cash flow from operating activities: Net income (loss) $17,513 $ (6,326) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 26,316 23,285 Deferred income (300) (300) Deferred income taxes (8) 2,444 Deferred compensation (92) (6,193) Restructuring charge - 14,500 Cumulative effect of accounting change - 26,154 Change in working capital (20,125) (13,978) ---------- -------- Net cash provided by operating activities 23,304 39,586 ---------- -------- Cash flow from investing activities: Additions to property, plant and equipment (23,290) (38,468) Purchase of short-term investments (3,000) (4,000) Proceeds from sale of short-term investments 11,900 13,232 Change in other noncurrent assets (2,027) 336 ---------- -------- Net cash used in investing activities (16,417) (28,900) ---------- -------- Cash flow from financing activities: Net repayments of short-term bank debt (1,800) (20,475) Proceeds from issuance of long-term debt 52 42,443 Payments on long-term debt and obligations under capital leases (5,900) (43,352) Net proceeds from issuance of common stock 2,840 1,216 Other (3,970) (694) ---------- -------- Net cash used in financing activities (8,778) (20,862) ---------- -------- Effect of exchange rate changes on cash and cash equivalents 422 740 ---------- -------- Net decrease in cash and cash equivalents (1,469) (9,436) Cash and cash equivalents, beginning of period 31,497 32,294 ---------- -------- Cash and cash equivalents, end of period $30,028 $22,858 ========== ========
5 The accompanying notes are an integral part of this statement. INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 1. BASIS OF PRESENTATION The consolidated financial statements included herein are unaudited, however, they contain all normal recurring accruals which, in the opinion of management, are necessary to present fairly the consolidated financial position of the Company at December 31, 1999 and the consolidated results of operations and cash flows for the six-month periods ended December 31, 1999 and 1998. It should be understood that accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The results of operations for the six-month period ended December 31, 1999 are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited consolidated financial statements do not include footnotes and certain financial presentations normally required under generally accepted accounting principles and, therefore, should be read in conjunction with the Annual Report on Form 10-K for the year ended June 30, 1999. The Company operates on a fiscal calendar under which the six months ended December 31, 1999 and 1998 consisted of 26 weeks, respectively. 2. NET INCOME PER COMMON SHARE Net income per common share - Basic is computed by dividing net income available to common shareholders (the numerator) by the weighted average number of common shares outstanding (the denominator) during the period. The computation of net income per common share - Diluted is similar to the computation of net income per common share - Basic except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. The following table provides a reconciliation of the numerator and denominator of the Basic and Diluted per-share computations for the three- and six-month periods ended December 31, 1999 and 1998 (in thousands except per share amounts): 6
NET INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT Three Months ended December 31, 1999 Net income per common share - Basic... $12,384 52,020 $0.24 Effect of dilutive securities: Stock options..................... 2,073 -------------------------------------------------------------- Net income per common share - Diluted $12,384 54,093 $0.23 ============================================================== NET INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT Three Months ended December 31, 1998 Net income per common share - Basic..... $19,794 51,532 $0.38 Effect of dilutive securities: Stock options....................... 159 -------------------------------------------------------------- Net income per common share - Diluted $19,794 51,691 $0.38 ============================================================== NET INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT Six Months ended December 31, 1999 Net income per common share - Basic... $17,513 51,974 $0.34 Effect of dilutive securities: Stock options....................... 1,620 -------------------------------------------------------------- Net income per common share - Diluted $17,513 53,594 $0.33 ============================================================== NET INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT Six Months ended December 31, 1998 (restated) Net loss per common share - Basic...... $(6,326) 51,523 $(0.12) Effect of dilutive securities: Stock options....................... 82 -------------------------------------------------------------- Net loss per common share - Diluted $(6,326) 51,605 $(0.12) ==============================================================
3. INVENTORIES Inventories are stated at the lower of cost (principally first-in, first-out) or market. Inventories at December 31, 1999 and June 30, 1999 (audited) were comprised of the following (in thousands):
DECEMBER 31, 1999 JUNE 30, 1999 ----------------- ------------- Raw materials $ 15,769 $ 15,277 Work-in-process 52,908 52,124 Finished goods 41,562 41,062 -------- --------- $110,239 $108,463 ======== =========
7 4. LONG-TERM DEBT AND OTHER LOANS A summary of the Company's long-term debt and other loans at December 31, 1999 is as follows (in thousands):
DECEMBER 31, 1999 ------------- Domestic bank loans collateralized by the majority of the Company's assets, payable in quarterly installments of principal and interest at variable rates of 8.6% and 11.0%, due in 2004 and 2005 $152,134 Capitalized lease obligations payable in varying monthly installments primarily at rates from 6.3% to 8.2%, due in 2002 though 2004 4,838 Foreign bank loans collateralized by property and/or equipment, payable in varying monthly installments at 10.8%, due in 2000 107 Foreign unsecured bank loans payable in varying monthly installments at rates from 4.3% to 8.4%, due in 2003 through 2006 3,445 ------------- Debt, including current portion of long-term debt of $7,904 160,524 Foreign unsecured revolving bank loans at rates from 1.5% to 8.5% 13,536 ------------- Total Debt $174,060 ============
In June 1999, the Company entered into a syndicated Credit Agreement with Banque Nationale de Paris. The financing consisted of two term loans totaling $155 million due in 2004 and 2005 and a $70 million revolving line of credit. The proceeds from the term loans were used to pay down all of the Company's existing long-term unsecured bank loans and substantially all domestic bank loans. As of December 31, 1999, $152.1 million was outstanding against these two term loans, and no borrowings have occurred against the $70 million revolving line of credit. The interest rate on these two term loans is based on a rate of 3.0% to 3.5% above the applicable LIBOR rate and 2.0% to 2.5% above the applicable base rate. The base rate applies to borrowings which are shorter than 30 days. The loans are collateralized by the majority of the Company's assets. The Credit Agreement imposes some restrictions, including the following: (a) maximum leverage, minimum interest coverage and fixed charge coverage ratios (b) minimum EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) (c) maximum capital expenditures and (d) a limitation on losses. The Credit Agreement also restricts the Company with respect to the payment of cash dividends, the sale of assets, mergers and acquisitions, additional financing, and investments. 5. RESTRUCTURING AND SEVERANCE CHARGES During the second quarter of fiscal 1999, the Company recorded a $14.5 million restructuring charge associated with plans to relocate high-volume assembly lines from 8 its facility in England to its facility in Mexico to take advantage of labor rate savings, to centralize more of its European customer service and administrative activities, and to reduce personnel. The Company expects to complete this operational transition over the six months ending on June 30, 2000. The charge consisted of $5.9 million for estimated severance costs associated with the elimination of approximately 350 positions, primarily operators and technicians; $6.1 million for the write-off of assets to be abandoned; and $2.5 million, which was charged to Cost of Sales, for the write-down of inventory related to specialty product lines. None of the assets written down (primarily building improvements relating to the high-volume assembly production lines and production information systems) will remain in use, and all will be abandoned after the production lines are relocated. In the third quarter of fiscal 1999, after appropriate notification was given to 43 remaining affected employees in the sales, customer service and administrative areas, the Company recorded a charge of $4.2 million relating to additional severance costs. The severance per person was larger for the third-quarter fiscal 1999 restructuring versus the second-quarter fiscal 1999 restructuring as the 43 positions included in the third-quarter fiscal 1999 restructuring were primarily relatively high-paid employees in sales and administrative management. The 350 positions in the second-quarter fiscal 1999 restructuring were primarily operators and technicians who on average have a much lower salary level. The Company estimates that, ultimately, charges associated with all of these actions will total approximately $18.7 million. As of December 31, 1999, the Company had eliminated 64 positions, paid $6.0 million for termination benefits related to this program and recorded the asset impairment of $8.6 million. The remaining unutilized restructuring accrual of $4.1 million, which is classified as current, relates to severance payments to be made to these previously notified employees for positions that are scheduled to be eliminated during the next six months. During the fourth quarter of fiscal 1999, the Company recorded an $8.3 million charge related to employee severance associated with the elimination of approximately 39 positions. This included a reduction in sales and administrative management staff levels and the resignation of Dr. Derek B. Lidow who shared the responsibility of Chief Executive Officer. As of December 31, 1999, the Company had eliminated 25 positions and paid $4.9 million in termination benefits. The remaining unutilized severance accrual of $3.4 million at December 31, 1999, which is classified as current, relates to severance payments to these previously notified employees for positions that are scheduled to be eliminated during the next six months. 6. GEOGRAPHICAL INFORMATION The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 131 in fiscal 1999. The Company operates in one operating segment. Revenues from unaffiliated customers are based on the location in which the sale originated. Geographic information for 1999 and 1998 is presented below (000's): 9
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, 1999 1998 1999 1998 ---- ---- ---- ---- Revenues from Unaffiliated Customers England.................................. $ 20,515 $ 18,387 $ 37,970 $ 38,692 Singapore................................ 30,786 18,314 57,368 36,900 Other Foreign............................ 47,899 32,152 89,376 58,549 -------------------------------------------------------------- Subtotal - Foreign...................... 99,200 68,853 184,714 134,141 United States............................ 64,198 57,275 123,511 115,042 Unallocated royalties.................... 7,700 6,709 15,112 11,147 -------------------------------------------------------------- Total................................ $171,098 $132,837 $323,337 $260,330 ==============================================================
DECEMBER 31, 1999 JUNE 30, 1999 ------------------ ------------- Identifiable Assets England............................................... $ 83,782 $103,002 Singapore............................................. 66,457 62,625 Other Foreign......................................... 60,718 32,549 --------------------------------------------- Subtotal - Foreign................................... 210,957 198,176 United States......................................... 452,445 482,636 Corporate assets...................................... 55,487 28,273 --------------------------------------------- Total............................................. $718,889 $709,085 =============================================
Corporate assets consist of cash, short-term investments, royalties receivable, inventory reserves, deferred taxes and certain other assets. One customer accounted for 11% of the Company's consolidated net revenues in the six months ended December 31, 1999. The same customer accounted for 10.6% of the Company's consolidated net revenues in the three months ended December 31, 1999. No single customer accounted for more than 10% of the Company's consolidated net revenues in the three or six months ended December 31, 1998, respectively. 7. ENVIRONMENTAL MATTERS Federal, state, and local laws and regulations impose various restrictions and controls on the storage, use and discharge of certain materials, chemicals, and gases used in semiconductor manufacturing processes. The Company does not believe that compliance with such laws and regulations as now in effect will have a material adverse effect on the Company's results of operations, financial position or cash flows. However, under some of these laws and regulations, the Company could be held financially responsible for remedial measures if properties are contaminated, or if waste is sent to a landfill or recycling facility that becomes contaminated. Also, the Company may be subject to common law claims if it releases substances that damage or harm third parties. The Company cannot make assurances that changes in environmental laws and 10 regulations will not require additional investments in capital equipment and the implementation of additional compliance programs in the future which could have a material adverse effect on the Company's results of operations, financial position or cash flows, as could any failure by the Company to comply with environmental laws and regulations. The Company and Rachelle Laboratories, Inc. ("Rachelle"), a former operating subsidiary of the Company that discontinued operations in 1986, were each named a potentially responsible party ("PRP") in connection with the investigation by the United States Environmental Protection Agency ("EPA") of the disposal of allegedly hazardous substances at a major superfund site in Monterey Park, California ("OII Site"). Certain PRPs who settled certain claims with the EPA under consent decrees filed suit in Federal Court in May 1992 against a number of other PRPs, including the Company, for cost recovery and contribution under the provisions of the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"). The Company has settled all outstanding claims that have arisen out of the OII Site. No claims against Rachelle have been settled. The Company received a letter directed to Rachelle, dated July 25, 1995, from the U.S. Department of Justice offering to settle claims against Rachelle relating to the first elements of clean-up work at the OII Site for $4,953,148 (the final remedy assessment has not yet been made). The offer stated that the settlement would not cover the cost of any additional remedial actions required to finish the clean-up. This settlement offer expired by its terms on September 1, 1995. On August 7, 1995, the Company received a Supplemental Information Request from the EPA directed to Rachelle, to which counsel for Rachelle responded with information regarding waste shipped to the OII Site. Counsel for Rachelle received a letter from the EPA dated September 30, 1997, requesting that Rachelle participate in the final remedial actions at the site, and counsel replied on October 21, 1997. The Company has taken the position that none of the wastes generated by Rachelle were hazardous. Neither the Company nor Rachelle, nor counsel for either of them, have received any further communication in connection with Rachelle's involvement with the OII Site. The Company cannot determine with accuracy the amount of the potential demand to Rachelle for the cost of the final remedy. Based upon information received to date, the Company believes that any demand for the cost of the final remedy would, if made, likely be significant, although it should be substantially below the demand amount for earlier phases of the OII Site clean-up. Any demands related to the costs for the final remedy would be in addition to the amount demanded for earlier phases of the OII Site clean-up. The Company's insurer has not accepted liability although it has made payments for defense costs for the lawsuit against the Company. The Company received a letter dated September 9, 1994, from the State of California Department of Toxic Substances Control stating that it may be a PRP for the deposit of hazardous substances at a facility in Whittier, California. In June 1995, the Company joined a group of other PRPs to remove contamination from the site. The group currently estimates the total cost of the clean-up to be between $20 million and $25 million, although the actual cost could be much higher. The Company estimated that it sent approximately 0.1% of the waste, by weight, sent by all PRPs contributing to the clean-up of the site, and the Company believes the cost of the clean-up will be roughly allocated among PRPs by 11 the amount of waste contributed. On July 31, 1999, the group proposed two settlement offers to the Company: one for $34,165 and the second for $68,330. The first settlement offer covers investigation and remediation of the site itself and a small area extending beyond the site. The second settlement offer covers this area plus all additional downgradient contamination. On September 14, 1999, the Company accepted the $68,330 settlement offer, which requires EPA acceptance, and made the required payment on September 28, 1999. There can be no assurance, however, that the EPA will accept the settlement offers or what the ultimate outcome of this matter will be. The Company believes that, whatever the outcome, it will not have a material adverse effect on the Company's financial condition, results of operations or cash flows. 8. INTELLECTUAL PROPERTY RIGHTS Most of the Company's broadest power MOSFET patents were subject to, and have successfully emerged from, reexamination by the United States Patent and Trademark Office ("PTO"). The Company's 5,008,725 and 5,130,767 patents are currently undergoing reexamination in the PTO. 9. LITIGATION On December 6, 1999, the Company filed suit in Federal District Court in Los Angeles, California against Semiconductor Components Industries, LLC, dba ON Semiconductor, alleging infringement of the following of the Company's U.S. patents: 4,376,286; 4,959,699; 4,593,302; 4,680,853; 4,642,666; 4,705,759; 5,008,725; and 5,338,961. The suit seeks damages and customary relief in such matters. The Company and certain of its directors and officers have been named as defendants in three class action lawsuits filed in Federal District Court for the Central District of California in 1991. These suits seek unspecified but substantial compensatory and punitive damages for alleged intentional and negligent misrepresentations and violations of the federal securities laws in connection with the public offering of the Company's common stock completed in April 1991 and the redemption and conversion in June 1991 of the Company's 9% Convertible Subordinated Debentures due 2010. They also allege that the Company's projections for growth in fiscal 1992 were materially misleading. Two of these suits also named the Company's underwriters, Kidder, Peabody & Co. Incorporated and Montgomery Securities, as defendants. On March 31, 1997, the Court, on the Company and the individual defendants' motion for summary judgment, issued the following orders: (a) the motion for summary judgment was granted as to claims brought under Sections 11 and 12(2) of the Securities Act of 1933; (b) the motion was denied as to claims brought under Section 10(b) of the Securities Exchange Act of 1934 and the Securities and Exchange Commission Rule 10b-5; and (c) the motion was granted as to the common law claims for fraud and negligent misrepresentation to the extent said claims are based on representations contained in the prospectuses and was denied in all other respects. The Court also granted the summary judgment motion brought by the underwriters. The plaintiffs' motion for reconsideration or certification of an interlocutory appeal of these orders was denied. 12 On January 28, 1998, the Court decertified the class pursuing common law claims for fraud and negligent misrepresentation and granted the defendants' motion to narrow the shareholder class period to June 19, 1991 through October 21, 1991. Plaintiffs' motion for reconsideration or certification of an interlocutory appeal of these rulings was denied. On June 14, 1999, the Court approved a notice of the pendency of the class action and a proof of claim form for dissemination to class members. Such dissemination took place in June 1999. Trial is scheduled for March 14, 2000. Although the Company believes that the remaining claims alleged in the suits are without merit, the ultimate outcome cannot be presently determined. A substantial judgment or settlement, if any, could have a material adverse effect on the Company's results of operations, financial position or cash flows. No provision for any liability that may result upon adjudication of these matters has been made in the Consolidated Financial Statements. 10. INCOME TAXES The Company's effective tax rate for the six months ended December 31, 1999 was approximately 27.9%, which differs from the U.S. federal statutory rate of 35% due primarily to higher statutory tax rates in certain foreign jurisdictions, offset by foreign tax credits, research and development credits, state tax credits, and decrease in valuation allowances. The Company's effective tax rate for the six months ended December 31, 1998 was approximately 34.6%, which differs from the U.S. federal statutory rate of 35% due primarily to increase in valuation allowances, higher statutory tax rates in certain foreign jurisdictions and foreign jurisdiction losses without foreign tax benefit, offset by foreign tax credits, research and development credits, and state tax credits. 11. INTEREST RATE SWAP AGREEMENT Under the Company's new Credit Agreement entered into on June 30, 1999, the Company is required to hedge the interest rate for at least half of the $152.1 million in outstanding term loans under the agreement. The Company has entered into interest rate swap agreements to hedge 50% of these outstanding term loans. The purpose of these swaps is to offset with a fixed interest rate a portion of the risk inherent in this variable-rate debt. At December 31, 1999, the Company had interest rate swap agreements in the amount of $75.8 million out of a total portfolio of variable rate debt outstanding of $152.1 million. Under these agreements, IR will pay the counterparties (the parties assuming the interest rate risk) interest at a weighted average fixed rate of 6.2% and the counterparties will pay IR interest at a variable rate equal to LIBOR. The weighted average three-month LIBOR rate applicable to these agreements was 6.2% at December 31, 1999. 12. RESTATEMENT In fiscal 1999, the Company reported a non-cash, after-tax charge of $26.2 million associated with the early adoption of Statement of Position ("SOP") 98-5, a mandated change in accounting practices for certain start-up and preoperating costs. This cumulative effect of accounting change was recorded retroactively to the first quarter of 1999 as a one-time charge. Such costs had previously been deferred and amortized by the Company. Therefore, the six months ending December 30, 1998 have been restated to reflect the above charge. 13. SUBSEQUENT EVENT On January 28, 2000, IR and Zing Technologies, Inc. announced that IR agreed to acquire all the outstanding shares of Zing for a cash purchase price of $15.36 per share. Zing's wholly-owned subsidiary and sole operating business, Omnirel, supplies power semiconductor modules and components. The net cash purchase price (net of Zing Technologies, Inc.'s cash) for the transaction is $28.5 million. IR expects to commence a cash tender offer in early February and expects to complete the transaction in the quarter ended March 31, 2000. The Company expects to fund the purchase price from its total liquidity at December 31, 1999 of $106.9 million. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS FOR THE THREE- AND SIX-MONTH PERIODS ENDED DECEMBER 31, 1999 COMPARED WITH THE THREE- AND SIX-MONTH PERIODS ENDED DECEMBER 31, 1998 The following table sets forth certain items as a percentage of revenues.
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, (UNAUDITED) (UNAUDITED) 1999 1998 1999 1998 -------- ------- ---------- ---------- (RESTATED) Revenues 100.0% 100.0% 100.0% 100.0% Cost of sales 66.0 72.8 67.1 72.2 ------- ------- ------- ------- Gross profit 34.0 27.2 32.9 27.8 Selling and administrative expense 15.8 18.4 16.6 18.7 Research and development expense 6.5 7.8 6.7 7.8 Restructuring charge - 9.0 - 4.6 ------- ------- ------- ------- Operating profit (loss) 11.7 (8.0) 9.6 (3.3) Interest expense, net (2.3) (2.2) (2.3) (2.1) Other income, net 0.4 33.0 0.2 17.0 ------- ------- ------- ------- Income before income taxes and cumulative effect of accounting change 9.8 22.8 7.5 11.6 Provision for income taxes 2.6 7.9 2.1 4.0 ------- ------- ------- ------- Income before cumulative effect of accounting change 7.2 14.9 5.4 7.6 Cumulative effect of accounting change - - - - ------- ------- ------- ------- (10.0) Net income (loss) 7.2% 14.9% 5.4% (2.4)% ======= ======= ======= =======
Revenues for the three-month period ended December 31, 1999 increased 28.8% to $171.1 million from $132.8 million in the year-ago period. Revenues for the six-month period ended December 31, 1999 increased 24.2% to $323.3 million from $260.3 million in the year-ago period. The revenue increase reflected strong demand in portable and consumer electronics, computers and servers and motor controls. Revenues in the six-month period included $15.1 million of net patent royalties, versus $11.1 million in the comparable prior-year period, reflecting a number of new license agreements and market growth. Royalty revenues in the three-month periods ended December 31, 1999 and 1998 were $7.7 million and $6.7 million, respectively. Product sales by region are based on the location to which the product is shipped. For the six months ended December 31, 1999, revenues were approximately 37% from North America, 24% from Europe and 39% from Asia, which includes Japan and Asia Pacific, compared to 41%, 26% and 33%, respectively, in the prior-year period. For the three months ended December 31, 1999 and 1998, product sales by region (based on the location of the customer) were approximately 36% from North America, 24% from Europe and 40% from Asia, which includes Japan and Asia Pacific, compared to 41%, 25% and 34%, respectively. Revenue in Asia Pacific grew 51% over the prior-year period, reflecting the continued move of 14 American and European manufacturing activities to this region as well as strong demand in all sectors of the Asia Pacific market. Twenty percent growth year-to-year from Japan reflects strong demand for proprietary products and improved market conditions. Europe remains stable, with continuing strength in the automotive and cellular phone industries. North America sales remained constant, despite the impact of several of our U.S. customers refocusing their assemblies into their Asian operations. December-quarter gross profit, including non-recurring items, increased to $58.2 million (34.0% of revenues) from $36.2 million (27.2% of revenues) in the comparable year-ago quarter. Gross profit including non-recurring items for the six-month period ended December 31, 1999 increased to $106.4 million (32.9% of revenues) from $72.4 million (27.8% of revenues) in the year-ago period. The gross margin increase reflected a higher proportion of revenue from proprietary products, lower manufacturing costs as a result of continued manufacturing efficiencies and restructuring efforts, and firm pricing. During December 1998, $2.5 million was charged to the cost of goods sold due to the write-down of inventory as a result of the planned relocation of assembly lines from the Company's facility in England to its facility in Mexico. Excluding the inventory charge, gross profit for the six-month period ended December 31, 1998 was 28.8% of revenue. See "Notes to Unaudited Consolidated Financial Statements Note 5. Impairment of Assets and Restructuring Charges". In the three- and six-month periods ended December 31, 1999, selling and administrative expense was $27.1 million and $53.7 million (15.8% and 16.6% of revenues), respectively, versus $24.4 million and $48.6 million (18.4% and 18.7% of revenues) in the comparable year-ago periods. The reduction in the ratio of selling and administrative expense to revenues reflects the results of ongoing initiatives to increase the productivity of selling and administrative activities and the benefit of restructuring programs. Selling and administrative expenses as a percentage of revenues is expected to decrease with rising sales. In the three- and six-month periods ended December 31, 1999, the Company's research and development expenditures increased to $11.1 million and $21.7 million (6.5% and 6.7% of revenues), respectively, compared to $10.4 million and $20.4 million (7.8% and 7.8% of revenues) in the comparable prior-year periods. The Company anticipates an increased level of research and development expenditures to accelerate the development of new products. With respect to current-quarter activity related to restructuring and severance charges taken in prior periods, refer to Note 5 of the Notes to Unaudited Consolidated Financial Statements. Other income was $0.6 million in the first half of fiscal 2000 versus other income of $44.3 million in the comparable prior-year period. During the second quarter of fiscal 1999, the Company recorded a $43.5 million pretax benefit related to the settlement of patent litigation. The income reported from these settlements was net of advanced and deferred royalty payments, patent defense costs, and the share of the Company's royalty proceeds payable to Unitrode Corporation. Net interest expense increased $1.0 million and $2.0 million in the three- and six-month periods ended December 31, 1999, compared to the respective prior-year periods. This increase reflects higher interest rates resulting from the terms of the new credit agreement entered into at the end of the fourth quarter of fiscal 1999. Net foreign currency gains and losses were less than $1.0 million in each six-month period. The Company's effective tax rate for the six months ended December 31, 1999 was approximately 27.9%, which differs from the U.S. federal statutory rate of 35% due primarily to higher statutory tax rates in certain foreign jurisdictions, offset by foreign tax credits, research and development credits, state tax credits, and decrease in valuation allowances. The Company's effective tax rate for the six months ended December 31, 1998 was approximately 34.6%, which differs from the U.S. federal statutory rate of 35% due primarily to increase in valuation allowances, higher statutory tax rates in certain foreign jurisdictions and foreign jurisdiction losses without foreign tax benefit, offset by foreign tax credits, research and development credits, and state tax credits. 15 In fiscal 1999, the Company reported a non-cash, after-tax charge of $26.2 million associated with the early adoption of Statement of Position ("SOP") 98-5, a mandated change in accounting practices for certain start-up and preoperating costs. This cumulative effect of accounting change was recorded retroactively to the first quarter of fiscal 1999 as a one-time charge. Such costs had previously been deferred and amortized by the Company. SEASONALITY The Company has experienced moderate seasonality in its business in recent years. On average over the past three years, the Company has reported approximately 48% of annual revenues in the first half and 52% in the second half of its fiscal year. Historical averages are not necessarily indicative of future results. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1999, the Company had cash and cash equivalent balances of $30.0 million. During the six-month period ended December 31, 1999, operating activities increased cash flow by $23.3 million. Net investing activities consumed $16.4 million, primarily due to capital expenditures of $23.3 million, offset in part by the liquidation of short-term investments. At December 31, 1999, the Company had made purchase commitments for capital expenditures of approximately $18.8 million. Based on current market conditions and assumptions, the Company plans fiscal 2000 capital investments of approximately $75 million, principally for fabrication and assembly capacity to meet market demand. The Company intends to fund capital expenditures, including, without limitation, the acquisition of all outstanding shares of Zing Technologies, Inc., and working capital requirements, through cash and cash equivalents on hand, anticipated cash flow from operations, and, as needed, from funds available from a revolving credit facility. Although the Company believes that funding will be sufficient, the Company may also consider the use of funds from other external sources, including, but not limited to, public or private offerings of debt or equity. Cash used in financing activities consumed $8.8 million. In June 1999, the Company entered into a syndicated Credit Agreement with Banque Nationale de Paris. The financing consisted of two term loans totaling $155 million due in 2004 and 2005 and a $70 million revolving line of credit. The proceeds from the term loans were used to pay down all of the Company's existing long-term unsecured bank loans and substantially all domestic bank loans. As of December 31, 1999, $152.1 million was outstanding against these two term loans, and no borrowings have occurred against the $70 million revolving line of credit. The interest rate on these two term loans is based on a rate of 3.0% to 3.5% above the applicable LIBOR rate and 2.0% and 2.5% above the applicable base rate. The base rate applies to borrowings which are shorter than 30 days. The loans are collateralized by the majority of the Company's assets. The Credit Agreement imposes some restrictions, including the following: (a) maximum leverage, minimum interest coverage and fixed charge coverage ratios (b) minimum EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) (c) maximum capital expenditures and (d) a limitation on losses. The Credit Agreement also restricts the Company with respect to the payment of cash dividends, the sale of assets, mergers and acquisitions, additional financing, and investments. 16 The Company also had $20.4 million in foreign revolving lines of credit, against which $13.5 million had been borrowed. Foreign term loan facilities of $3.6 million and equipment financing facilities of $4.8 million were both fully utilized. As of December 31, 1999, the Company had credit facilities of $250.9 million, against which $174.1 million had been borrowed. Based on cash and cash equivalents on hand and its unused credit facilities, at December 31, 1999, the Company's liquidity was $106.9 million. Three class action lawsuits have been brought against the Company and its Board of Directors. See Note 9. Litigation for further information. Although the Company believes that these class action lawsuits are without merit, the ultimate outcome and the related effect on liquidity thereof cannot be presently determined. Accordingly, the Company has not made any provision for any liability, if any, that may result upon adjudication of these matters. For the possible effects of environmental matters on liquidity, see Note 7. Environmental Matters. IMPACT OF THE INTRODUCTION OF THE EURODOLLAR On January 1, 1999, eleven member states of the European Union established fixed conversion rates between their existing national currency and a common currency, the "euro." Until January 1, 2002, either the euro or the participating country's present currency will be accepted in non-cash transactions. On January 1, 2002, euro-denominated bills and coins will be issued and the participating country's present currency will be gradually withdrawn during a short period of dual circulation of no more than three months. The Company has undertaken an internal analysis to determine the effects of the January 1, 2002 conversion. The assessment includes the potential impact of the technical challenges to adapt information technology and other systems to accommodate euro-denominated transactions, the impact on currency exchange rate risk and currency exchange costs, and the impact on existing contracts. Based on currently available information, management does not believe that the euro conversion will have a material adverse impact on the Company's business or financial condition. The Company will continue to evaluate the impact of the euro conversion. RESTRUCTURING AND SEVERANCE CHARGES During the second quarter of fiscal 1999, the Company recorded a $14.5 million restructuring charge associated with plans to relocate high-volume assembly lines from its facility in England to its facility in Mexico to take advantage of labor rate savings, to centralize more of its European customer service and administrative activities, and to reduce personnel. The Company expects to complete this operational transition over the nine months ending on June 30, 2000. The charge consisted of $5.9 million for estimated severance costs associated with the elimination of approximately 350 positions, primarily operators and technicians; $6.1 million for the write-off of assets to be abandoned; and $2.5 million, which was charged to Cost of Sales, for the write-down of inventory related to specialty product lines. None of the assets written down (primarily building improvements relating to the high-volume assembly production lines and production information systems) will remain in use, and all will be abandoned after the production lines are relocated. In the third quarter of fiscal 1999, after appropriate notification was given to 43 17 remaining affected employees in the sales, customer service and administrative areas, the Company recorded a charge of $4.2 million relating to additional severance costs. The severance per person was larger for the third-quarter fiscal 1999 restructuring versus the second-quarter fiscal 1999 restructuring as the 43 positions included in the third-quarter fiscal 1999 restructuring were primarily relatively high-paid employees in sales and administrative management. The 350 positions in the second-quarter fiscal 1999 restructuring were primarily operators and technicians who on average have a much lower salary level. The Company estimates that, ultimately, charges associated with all of these actions will total approximately $18.7 million. The anticipated cost savings from the second and third fiscal 1999 quarter restructuring activities are expected to total approximately $5 million in fiscal 2000 and $13 million annually thereafter. The estimated savings consist of lower direct labor cost, lower factory overhead (including lower depreciation expense), lower materials costs and lower selling and administrative costs. As of December 31, 1999, the Company had eliminated 64 positions, paid $6.0 million for termination benefits related to this program and recorded the asset impairment of $8.6 million. The remaining unutilized restructuring accrual of $4.1 million, which is classified as current, relates to severance payments to be made to these previously notified employees for positions that are scheduled to be eliminated during the next six months. During the fourth quarter of fiscal 1999, the Company recorded an $8.3 million charge related to employee severance associated with the elimination of approximately 39 positions. This included a reduction in sales and administrative management staff levels and the resignation of Dr. Derek B. Lidow who shared the responsibility of Chief Executive Officer. As of December 31, 1999, the Company had eliminated 25 positions and paid $4.9 million in termination benefits. The remaining unutilized severance accrual of $3.4 million at December 31, 1999, which is classified as current, relates to severance payments to these previously notified employees for positions that are scheduled to be eliminated during the next six months. RECENT ACCOUNTING PRONOUNCEMENTS Effective the first day of fiscal 2000, the Company adopted SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Issued by the American Institute of Certified Public Accountants ("AICPA"), SOP 98-1 provides standards on accounting for the costs of computer software developed or obtained for internal use. The new standards do not significantly differ from the Company's previous accounting treatment for software developed or obtained for internal use and did not have a significant impact on the Consolidated Financial Statements. During fiscal 1999, the Company elected early adoption of SOP 98-5, "Reporting on the Costs of Start-Up Activities." This new accounting standard, issued in April 1998 by the AICPA, requires most entities to expense all start-up and preoperating costs as they are incurred. The Company previously followed the accounting practice of deferring such costs until the start-up of each new process and then amortizing those costs over the life of the related asset. The change was required to be made retroactive to the first quarter of the fiscal year in which it was adopted. The cumulative effect of this change in accounting principle, net of income tax benefit 18 of $5.4 million, was $26.2 million, $0.50 per basic and diluted share, and was recorded retroactively to the first quarter of fiscal 1999 as a one-time charge. Currently, all start-up and preoperating costs are expensed as incurred. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities," which was later amended by SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 133 establishes standards for the accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. This Statement generally requires recognition of gains and losses on hedging instruments, based on changes in fair value or the earnings effect of a forecasted transaction. SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Management does not believe that SFAS No. 133 or SFAS No. 137 will have a material impact on the Consolidated Financial Statements. YEAR 2000 READINESS The Year 2000 issue is the result of many existing computer programs and embedded microprocessors using only two digits to refer to the year. Beginning in the year 2000, these systems need to be upgraded or replaced to distinguish 21st century dates from 20th century dates. The Company has adopted the definition of Year 2000 conformity published by the British Standards Institute ("BSI") as DISC PD2000-1. Currently, none of the Company's products contain date processing logic. The Company, therefore, believes that its products are Year 2000 compliant pursuant to the BSI DISC PD2000-1 definition. The Company's Global Year 2000 Team was formed to manage and coordinate company-wide Year 2000 initiatives, while local site teams address research and remediation for site-specific equipment, facilities and suppliers. The Company is currently estimating $7.5 million for the cost of investigation and remediation for the period August 1997 to March 2000. The estimate includes staff salaries and remediation expenses. Through December 31, 1999, the Company has expensed $6.9 million of this estimate. The Company has successfully completed the verification process for all internal information systems, factory equipment, facilities, suppliers and business partners. To date, the Company has not experienced any business interruptions due to any Year 2000 related cause and has concluded all of its planned investigation and remediation related to the Year 2000 issue. Furthermore, the Company has established programs to ensure that current and future purchases of equipment and software are Year 2000 compliant pursuant to the BSI DISC PD2000-1 definition. Based on currently available information, management does not believe that the Year 2000 matters discussed above will have a material adverse impact on the Company's financial condition, liquidity, or results of operations. There can be no assurance that the Company's compliance efforts and contingency plans will adequately address every issue that may arise 19 in the year 2000. The costs of the Company's Year 2000 remediation reflect the Company's best estimates, which were based on assumptions of future events, including the continued availability of certain resources, third-party compliance and other factors. There can be no assurance that these estimates will be achieved, and actual results could differ materially from those anticipated. The disclosures contained herein are Year 2000 statements and constitute a Year 2000 Readiness Disclosure under Public Law No. 105-271. CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Form 10-Q Report contains some statements that are not historical facts but are "forward-looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements can be identified by the use of forward-looking terminology such as "anticipate," "believe," "estimate," "expect," "may," "should," "view," or "will" or the negative or other variations thereof. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those projected. Financial results are to a large extent dependent on the power MOSFET segment of the power semiconductor industry. If market demand does not continue to grow, revenue growth may be impacted, manufacturing capacity might be under-utilized, capital spending might be slowed, and Company performance might be negatively impacted. Other risks and uncertainties that could negatively impact Company results include: delays in or higher-than-anticipated expenses associated with implementing planned cost reductions; the effectiveness; the impact of changes in accounting methods; the impact of trade and export regulations and policies; export controls; the actual results of outstanding litigation; changes in environmental laws and regulations; delays in transferring and ramping production lines or completing customer qualifications; the accuracy of customers' forecasts; the ability of current manufacturing facilities to meet future operating needs; the rate of customer inventory adjustments; push-out of delivery dates; product returns; changes in customers' order patterns; the Company's mix of product shipments; the actual growth of the portable electronics industry; the continued rapid growth of demand for more efficient semiconductor components and power conversion solutions; market and sector conditions that affect our customers, licensees, and suppliers; pricing pressures; acceptance of competitors' products; introduction, acceptance, and availability of new products; inability of the Company to fund capital expenditures from existing credit facilities or other external sources; the failure of suppliers and subcontractors to meet their delivery commitments to the Company; unanticipated impacts on the Company's business or financial condition due to the euro conversion; the failure of the Company to realize the anticipated efficiencies from its change in management structure; impact on the Company's business from internal systems, or from the business or systems of suppliers, customers, licensees and other third parties being adversely affected by year 2000 problems; unfavorable changes in industry and competitive conditions; and continued improvement in economic conditions in the Company's markets around the world. 20 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to various risks, including changes in interest rates that affect the repayment of debt and return on investments and foreign currency rate fluctuations. The Company does not hold or purchase any foreign currency or interest rate contracts for trading purposes. The Company's objective in managing the exposure to foreign currency changes is to reduce the risk to earnings and cash flow by entering into forward exchange contracts which are intended to reduce risks associated with the value of its existing foreign currency assets, liabilities, firm commitments and anticipated foreign revenues and costs. The gains and losses on these contracts are intended to offset changes in the related exposures. The Company does not hedge its foreign currency exposure in a manner that would entirely eliminate the effects of changes in foreign exchange rates on the Company's consolidated net income. In the normal course of business, the Company also faces risks that are either nonfinancial or nonquantifiable. Such risks principally include country risk, credit risk and legal risk and are not discussed or quantified in the following analyses. INTEREST RATE RISK The financial assets of the Company are principally short-term investments that are not subject to significant interest rate risk. The financial liabilities of the Company that are subject to interest rate risk are its long-term debt obligations as of December 31, 1999 (see Note 4 of the Notes to the Unaudited Consolidated Financial Statements). An increase in interest rates of as much as 70 basis points (approximately 10% of the Company's weighted average interest rate on debt) affecting the Company's financial instruments would not have a material effect on the Company's results of operations, financial position or cash flows. Under the Company's new Credit Agreement entered into on June 30, 1999, the Company is required to hedge the interest rate for at least half of the $152.1 million in outstanding term loans under the agreement. The Company has entered into interest rate swap agreements to hedge 50% of these outstanding term loans. The purpose of these swaps is to offset with a fixed interest rate a portion of the risk inherent in this variable-rate debt. At December 31, 1999, the Company had $75.8 million in interest swap agreements out of a total portfolio of variable rate debt outstanding of $152.1 million. Under these agreements, IR will pay the counterparties (the parties assuming the interest rate risk) interest at a weighted average fixed rate of 6.2% and the counterparties will pay IR interest at a variable rate equal to LIBOR. The weighted average three-month LIBOR rate applicable to these agreements was 6.2% at December 31, 1999. FOREIGN CURRENCY RISK The Company conducts business in various parts of the world and in various foreign currencies. The Company manages potential foreign currency exposure by entering into forward foreign exchange contracts or other non-speculative risk management instruments to hedge foreign currency denominated receivables and payables at certain of its international subsidiaries. At quarter-end, the Company evaluated the effect that near-term changes in foreign exchange rates would have had on the fair value of the Company's combined foreign currency position, related to its outstanding foreign currency forward exchange contracts. If the Company experienced an adverse change in foreign exchange rates of as much as 10%, the 21 potential decrease in the Company's foreign currency position would have had an immaterial effect on the Company's results of operations, financial position and cash flows. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERNATIONAL RECTIFIER CORPORATION ------------------------------------ REGISTRANT February 3, 2000 MICHAEL P. MCGEE ------------------------------ Michael P. McGee Executive Vice President, Chief Financial Officer and Principal Accounting Officer 23 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The following matters were submitted to a vote of the stockholders of the Company at the Company's Annual Meeting of Stockholders held on November 22, 1999, with the following results: AUTHORITY Description of matter FOR WITHHELD 1. Election of Directors Rochus E. Vogt 47,472,499 912,913 Robert J. Mueller 47,461,038 924,374 Alexander Lidow 47,433,524 951,888 Minoru Matsuda 47,470,244 915,168
FOR AGAINST ABSTENTIONS 2. Approval of the 2000 Stock Incentive Plan 23,226,165 15,951,168 454,124 Broker Non-Vote on Proposal 2 8,753,955 FOR AGAINST ABSTENTIONS 3. Ratification of PricewaterhouseCoopers LLP as Independent Auditors for fiscal 2000 48,134,300 168,918 81,850 Broker Non-Vote on Proposal 3 344
24 EX-27 2 EXHIBIT 27 (FDS)
5 1,000 6-MOS JUL-02-2000 JUL-05-1999 JAN-02-2000 30,028 0 147,613 1,809 110,239 316,547 640,255 262,336 718,889 136,256 0 0 0 52,061 365,625 718,889 323,337 323,337 216,916 216,916 75,400 168 7,320 24,301 6,788 17,513 0 0 0 17,513 0.34 0.33
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