-----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, HPqhxzCCI3JR9C7/oVz4h2OwKOvDjdkShv33SE0cDilazB2I8GK+U1f5EijXsRvm iIw82xgwSKQdXG8dxML/0w== 0000912057-00-025083.txt : 20000517 0000912057-00-025083.hdr.sgml : 20000517 ACCESSION NUMBER: 0000912057-00-025083 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000516 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: 637207 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 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 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 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 NINE MONTHS ENDED MARCH 31, MARCH 31, ----------------------------- ----------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- (RESTATED) 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 =========== =========== =========== ===========
The accompanying notes are an integral part of this statement. 3 INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, ----------------------------- ----------------------------- 2000 1999 2000 1999 ---------- ----------- ----------- ----------- 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 =========== =========== ============ ===========
The accompanying notes are an integral part of this statement. 4 INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In thousands)
MARCH 31, 2000 JUNE 30, (UNAUDITED) 1999 ----------------- -------------- 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 ================= ==============
The accompanying notes are an integral part of this statement. 5 INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands)
NINE MONTHS ENDED MARCH 31, ---------------------------------- 2000 1999 ------------- ------------- (restated) 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 ============= =============
The accompanying notes are an integral part of this statement. 6 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 2. NET INCOME PER COMMON SHARE (CON'T)
NET INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ------------- ------------- ----------- 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) ===========================================================
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 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): 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 ========
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 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 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):
THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, 2000 1999 2000 1999 ---- ---- ---- ---- 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 ====================================================================
MARCH 31, JUNE 30, 2000 1999 ---------- ---------- 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 ====================================
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 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 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 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 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 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.
THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, (UNAUDITED) (UNAUDITED) ---------------------------- ---------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ (RESTATED) 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)% ============ ============ ============ ============
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 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 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 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 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 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 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 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 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 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 EX-27.1 2 EXHIBIT 27.1 (FDS)
5 1,000 3-MOS JUL-02-2000 JAN-02-2000 APR-02-2000 203,353 5,000 178,034 4,666 118,761 534,401 657,613 272,560 958,413 141,969 0 0 0 62,716 737,034 958,413 197,959 197,959 125,530 125,530 50,561 50 2,138 30,155 8,460 21,695 0 4,772 0 16,923 0.31 0.29
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