-----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, El1QIg4LudEaInal3zg37lowO+xJgLcw9lIIvep57RJhjeB4nGoogwA6sML5tZ9V oLFxFR9gwl+jXfiP/r+ENA== 0000912057-01-005316.txt : 20010223 0000912057-01-005316.hdr.sgml : 20010223 ACCESSION NUMBER: 0000912057-01-005316 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010214 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: 1539254 BUSINESS ADDRESS: STREET 1: 233 KANSAS ST CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3107268000 10-Q 1 a2038460z10-q.txt 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, 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 62,305,246 SHARES OF THE REGISTRANT'S COMMON STOCK, PAR VALUE $1.00 PER SHARE, OUTSTANDING ON FEBRUARY 13, 2001. Page 1 of 25 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION
PAGE ITEM 1. FINANCIAL STATEMENTS REFERENCE Unaudited Consolidated Statement of Income for the Three-Month and Six-Month Periods Ended December 31, 2000 and 1999 3 Unaudited Consolidated Statement of Comprehensive Income for the Three-Month and Six-Month Periods Ended December 31, 2000 and 1999 4 Unaudited Consolidated Balance Sheet as of December 31, 2000 and June 30, 2000 (audited) 5 Unaudited Consolidated Statement of Cash Flows for the Six-Month Periods Ended December 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. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK 22 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 23 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 24
Page 2 of 25 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 ---------------------------------- ----------------------------- 2000 1999 2000 1999 --------------- -------------- ------------ ------------ Revenues $268,069 $171,098 $517,504 $323,337 Cost of sales 158,963 112,896 309,695 216,916 --------------- -------------- ------------ ------------- Gross profit 109,106 58,202 207,809 106,421 Selling and administrative expense 34,704 27,084 68,491 53,740 Research and development expense 16,685 11,064 31,636 21,660 --------------- -------------- ------------ ------------- Operating profit 57,717 20,054 107,682 31,021 Other income (expense): Net interest income (expense) 5,890 (3,895) 11,781 (7,320) Other, net 24 600 284 600 --------------- -------------- ------------ ------------- Income before income taxes 63,631 16,759 119,747 24,301 Provision for income taxes 17,105 4,375 31,134 6,788 --------------- -------------- ------------ ------------- Net income $ 46,526 $ 12,384 $88,613 $17,513 =============== ============== ============ ============= Net income per common share - Basic: $ 0.75 $ 0.24 $ 1.43 $ 0.34 =============== ============== ============ ============= Net income per common share - Diluted: $ 0.71 $ 0.23 $ 1.34 $ 0.33 =============== ============== ============ ============= Average common shares outstanding - Basic 62,004 52,020 61,918 51,974 =============== ============== ============ ============= Average common shares and potentially dilutive securities outstanding - Diluted 65,497 54,093 66,079 53,594 =============== ============== ============ =============
The accompanying notes are an integral part of this statement. Page 3 of 25 INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31 DECEMBER 31 --------------------------------- ------------------------------ 2000 1999 2000 1999 ------------- -------------- ------------ ------------- Net income $ 46,525 $ 12,384 $ 88,613 $17,513 ------------- -------------- ------------ ------------- Other comprehensive income (loss), net of tax effect of $564, $172, $1,235 and $(290), respectively: Foreign currency translation adjustments (906) (659) (4,852) 1,039 Unrealized gains (loss) on securities: Unrealized holding gains (loss) arising (698) - 1,337 - during the period ------------- -------------- ------------ ------------- Other comprehensive income (loss) $(1,604) $ (659) $(3,515) $1,039 ------------- -------------- ------------ ------------- Comprehensive income $44,921 $ 11,725 $85,097 $18,552 ============= ============== ============ =============
The accompanying notes are an integral part of this statement. Page 4 of 25 INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN THOUSANDS)
DECEMBER 31, 2000 JUNE 30, (UNAUDITED) 2000 ----------- ------------ ASSETS Current assets: Cash and cash equivalents $ 555,323 $ 196,406 Short-term investments 279,424 57,930 Trade accounts receivable, net 205,742 180,349 Inventories 117,001 117,974 Deferred income taxes 23,116 21,953 Prepaid expenses and other receivables 38,647 17,011 ----------- ----------- Total current assets 1,219,253 591,623 Property, plant and equipment, net 409,963 390,787 Other assets 86,319 43,560 ----------- ----------- Total assets $ 1,715,535 $ 1,025,970 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Bank loans $ 9,489 $ 12,089 Long-term debt, due within one year 1,571 1,984 Accounts payable 94,576 85,580 Accrued salaries, wages and commissions 19,775 17,757 Other accrued expenses 63,759 32,750 ----------- ----------- Total current liabilities 189,170 150,160 Long-term debt, less current maturities 553,449 4,589 Other long-term liabilities 7,747 8,486 Deferred income taxes 22,447 18,669 Stockholders' equity: Common stock 62,053 61,594 Capital contributed in excess of par value 638,088 627,118 Retained earnings 249,818 161,205 Accumulated other comprehensive loss (7,237) (5,851) ----------- ----------- Total stockholders' equity 942,722 844,066 ----------- ----------- Total liabilities and stockholders' equity $ 1,715,535 $ 1,025,970 =========== ===========
The accompanying notes are an integral part of this statement. Page 5 of 25 INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands)
SIX MONTHS ENDED DECEMBER 31 -------------------------- 2000 1999 --------- --------- Cash flow from operating activities: Net income $ 88,613 $ 17,513 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 30,484 26,316 Deferred income (300) (300) Deferred income taxes 2,915 (8) Deferred compensation -- (92) Change in working capital (1,578) (20,125) --------- --------- Net cash provided by operating activities 120,134 23,304 --------- --------- Cash flow from investing activities: Additions to property, plant and equipment (45,058) (23,290) Proceeds from sale of property, plant & equipment 1,459 -- Purchase of short-term investments (221,529) (3,000) Acquisition of businesses net of cash (24,656) -- Proceeds from sale of short-term investments -- 11,900 Change in other investing activities (11,514) (2,027) --------- --------- Net cash used in investing activities (301,298) (16,417) --------- --------- Cash flow from financing activities: Net proceeds (repayments) of short-term bank debt 863 (1,800) Proceeds from issuance of convertible debt, net 529,511 52 Payments on long-term debt and obligations under capital leases (1,118) (5,900) Proceeds from exercise of stock options 11,429 2,840 Other, net (361) (3,970) --------- --------- Net cash provided by (used in) financing activities 540,324 (8,778) --------- --------- Effect of exchange rate changes on cash and cash equivalents (243) 422 --------- --------- Net increase (decrease) in cash and cash equivalents 358,917 (1,469) Cash and cash equivalents, beginning of period 196,406 31,497 --------- --------- Cash and cash equivalents, end of period $ 555,323 $ 30,028 ========= =========
The accompanying notes are an integral part of this statement. Page 6 of 25 INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) DECEMBER 31, 2000 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements include the accounts of the Company and all of its majority-owned subsidiaries, which are located in North America, Europe, Mexico, Japan, India and Southeast Asia. All significant intercompany transactions, balances and profits have been eliminated in consolidation. The consolidated financial statements included herein are unaudited; however, they contain all normal recurring adjustments which, in the opinion of management, are necessary to present fairly the consolidated financial position of the Company at December 31, 2000 and the consolidated results of operations and cash flows for the six-month periods ended December 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 six-month period ended December 31, 2000 are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited consolidated financial statements should be read in conjunction with the Annual Report on Form 10-K for the fiscal year ended June 30, 2000. The Company operates on a fiscal calendar under which the six months ended December 31, 2000 and 1999 consisted of 26 weeks each. 2. NET INCOME PER COMMON SHARE Net income per common share - Basic is computed by dividing net income available to common stockholders (the numerator) by the weighted average number of common shares outstanding (the denominator) during the period. Net income per common share - Diluted differs from Net income from common share - Basic due to certain assumed conversions of dilutive securities such as options and convertible debt. The Company's convertible debt was anti-dilutive for the periods presented. The following table provides a reconciliation of the numerator and denominator of the Basic and Diluted per-share computations for the six-month periods ended December 31, 2000 and 1999 (in thousands except per share amounts): Page 7 of 25 2. NET INCOME PER COMMON SHARE (CON'T)
Net Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- --------- Three Months ended December 31, 2000 $ 46,526 62,004 $ 0.75 Net income per common share - Basic Effect of dilutive securities: Stock options........................... - 3,493 (0.04) ------------------------------------------------------------ Net income per common share - Diluted $ 46,526 65,497 $0.71 ============================================================ 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 (0.01) ------------------------------------------------------------ Net income per common share - Diluted $ 12,384 54,093 $0.23 ============================================================ Six Months ended December 31, 2000 Net income per common share - Basic $88,613 61,918 $1.43 Effect of dilutive securities: Stock options........................... 4,161 (0.09) ------------------------------------------------------------ Net income per common share - Diluted $88,613 66,079 $1.34 ============================================================ 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 (0.01) ------------------------------------------------------------- Net income per common share - Diluted $17,513 53,594 $ 0.33 =============================================================
3. CASH AND CASH EQUIVALENTS The Company classifies all highly liquid investments with maturities of three months or less as cash equivalents. The cost of these investments approximates fair value. 4. INVESTMENTS The Company considers all investments, besides cash and cash equivalents, with maturities up to 15 months or less to be available-for-sale under the Statement of Financial Accounting Standards No. ("SFAS") 115, "Accounting for Certain Investments in Debt and Equity Securities", which are reported in the balance sheet as short-term investments and adjusted to fair market value through Other Comprehensive Income. Page 8 of 25 Available-for-Sale Securities as of December 31, 2000:
Gross Gross Amortized Unrealized Unrealized Market SHORT-TERM INVESTMENTS: Cost Gain Loss Value --------------- ---------------- --------------- ------------- Corporate Debt $200,020 $ 422 $ (37) $200,405 U.S. Government and Agency Obligations 47,576 52 (16) 47,612 Other Debt 31,344 63 - 31,407 --------------- ---------------- --------------- ------------- $278,940 $ 537 $ (53) $279,424 =============== ================ =============== ============= LONG-TERM INVESTMENTS: Equity Securities $10,032 $1,353 - $ 11,385 =============== ================ =============== =============
5. INVENTORIES Inventories are stated at the lower of cost (principally first-in, first-out) or market. Inventories at December 31, 2000 and June 30, 2000 (audited) were comprised of the following (in thousands):
December 31, 2000 June 30, 2000 ----------------- ------------- Raw materials $ 28,072 $ 18,296 Work-in-process 56,612 59,654 Finished goods 32,317 40,024 ------------ ------------- $ 117,001 $ 117,974 ============ =============
Page 9 of 25 6. BANK LOANS AND LONG-TERM DEBT A summary of the Company's long-term debt and other loans at December 31, 2000 and June 30, 2000 (audited) is as follows (in thousands):
December 31, June 30, 2000 2000 ---- ---- Convertible subordinated notes at 4.25% due 2007 $550,000 $ - Other loans and capitalized lease obligations 5,020 6,573 -------------- -------------- Debt, including current portion of long-term debt ($1,571 December 2000 and $1,984 June 2000, respectively) 555,020 6,573 Foreign unsecured revolving bank loans at rates from 1.5% to 8.5% 9,489 12,089 -------------- -------------- Total Debt $564,509 $18,662 ============== ==============
On July 13, 2000, the Company sold $550 million principal amount of 4 1/4% Convertible Subordinated Notes due 2007. The interest rate is 4 1/4% per annum on the principal amount, payable semi-annually in arrears in cash on January 15 and July 15 of each year, beginning January 15, 2001. The notes are convertible into shares of the Company's common stock at any time on or before July 15, 2007, at a conversion price of $73.935 per share, subject to adjustment if certain events affecting the Company's common stock occur. The notes are subordinated to all of the Company's existing and future senior indebtedness and to all debt and other liabilities of the Company's subsidiaries. The Company may redeem any of the notes, in whole or in part, on or after July 18, 2003, as specified in the notes and the indenture agreement covering the notes. The Company filed a shelf registration statement with the SEC on October 16, 2000, which became effective on November 24, 2000, covering the resale of the notes and the underlying common stock. The Company has agreed to use reasonable efforts to keep the shelf registration statement effective until either of the following has occurred: - All securities covered by the registration statement have been sold; or - The expiration of the holding period applicable with respect to the notes and the underlying common stock under Rule 144(k) under the Securities Act, or any successor provision. In addition, in November 2000, the Company entered into a three-year syndicated multi-currency revolving credit facility with BNP Paribas and seven other banks, which provided a credit line of $150 million. The credit agreement will allow borrowing by the Company's foreign subsidiaries, and provide funding for the Company's general corporate purposes. The facility bears interest at (i) local currency rates plus (ii) a margin between 0.25% and 1.125% for base rate advances and a margin of between 1.25% and 2.125% for eurocurrency rate advances. Other advances bear interest as set forth in the credit Page 10 of 25 agreement. The commitment fee for the credit agreement is 0.375% of the unused portion of the credit facility, annually. The facility also contains certain financial and other covenants. The Company pledged as security certain shares of certain of its subsidiaries. As of December 31, 2000, the Company had no cash borrowings outstanding under the credit agreement. 7. RESTRUCTURING AND SEVERANCE CHARGES During June 1999, the Company recorded an $8.3 million charge related to employee severance associated with the elimination of approximately 39 positions. We completed this restructuring as of June 2000, with the actual elimination of a total of 36 positions. As of December 31, 2000, we had paid $7.0 million in termination benefits. The remaining unutilized severance accrual of $1.3 million at December 31, 2000, which is classified as current, relates to ongoing severance payments attributed to certain of those eliminated positions. Page 11 of 25 8. GEOGRAPHICAL INFORMATION The Company operates in one business segment. Revenues from unaffiliated customers are based on the location in which the sale originated. Geographic information for December 31, 2000 and 1999 is presented below (000's):
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, ----------------------------------------------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- REVENUES FROM UNAFFILIATED CUSTOMERS Asia Pacific and Japan............ $95,716 $61,073 $186,284 $112,264 Europe............................ 56,472 38,127 108,662 72,449 North America..................... 103,281 64,198 198,548 123,512 ----------------- ----------- ----------- ----------- Subtotal...................... 255,469 163,398 493,494 308,225 Unallocated royalties............. 12,600 7,700 24,010 15,112 ----------------- ----------- ----------- ----------- Total......................... $268,069 $171,098 $517,504 $323,337 ================= =========== =========== ===========
DECEMBER 31, JUNE 30, 2000 2000 ---- (unaudited) LONG-LIVED ASSETS Asia Pacific and Japan.......................................................... $11,353 $4,746 Europe.......................................................................... 40,120 43,086 North America................................................................... 444,809 386,515 ------------ ----------- Total....................................................................... $496,282 $434,347 ============ ===========
No single customer accounted for more than 10% of the Company's consolidated net revenues in the three-months and six-months ended December 31, 2000. One distributor accounted for 10.6% and 11.0% of the Company's consolidated net revenues in the three- and six-months ended December 31, 1999, respectively. 9. ENVIRONMENTAL MATTERS Federal, state, and local laws and regulations impose various restrictions and controls on the storage, use and discharge of certain materials, chemicals, and gases used in semiconductor manufacturing processes. The Company does not believe that compliance with such laws and regulations as now in effect will have a material adverse effect on the Company's results of operations, financial position or cash flows. However, under some of these laws and regulations, the Company could be held financially responsible for remedial measures if properties are contaminated, or if waste is sent to a landfill or recycling facility that becomes contaminated. Also, the Company may be subject to common law claims if it releases substances that damage or harm third parties. The Company cannot make assurances that changes in environmental laws and regulations will not require additional investments in capital equipment and the 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. Page 12 of 25 The Company and Rachelle Laboratories, Inc. ("Rachelle"), a former operating subsidiary of the Company that discontinued operations in 1986, were each named a potentially responsible party ("PRP") in connection with the investigation by the United States Environmental Protection Agency ("EPA") of the disposal of allegedly hazardous substances at a major superfund site in Monterey Park, California ("OII Site"). Certain PRPs who settled certain claims with the EPA under consent decrees filed suit in Federal Court in May 1992 against a number of other PRPs, including the Company, for cost recovery and contribution under the provisions of the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"). The Company has settled all outstanding claims that have arisen out of the OII Site. No claims against Rachelle have been settled. The Company also received a letter directed to Rachelle, dated July 25, 1995 from the U.S. Department of Justice, offering to settle claims against Rachelle relating to the first elements of clean-up work at the OII Site for $4,953,148 (the final remedy assessment has not yet been made). The offer stated that the settlement would not cover the cost of any additional remedial actions required to finish the clean-up. This settlement offer expired by its terms on September 1, 1995. On August 7, 1995, the Company received a Supplemental Information Request from the EPA directed to Rachelle, to which counsel for Rachelle responded with information regarding waste shipped to the OII Site. Counsel for Rachelle received a letter from the EPA dated December 31, 1997, requesting that Rachelle participate in the final remedial actions at the site, and counsel replied on October 21, 1997. The Company has taken the position that none of the wastes generated by Rachelle were hazardous. Counsel for Rachelle received a request from the EPA in June 2000 to update the name of the contact party for Rachelle designated to receive information on future proposed settlements. The request appears to have been sent to all PRPs and indicated that the EPA intends to formulate a final settlement offer in the near future. The Company cannot determine with accuracy the amount of the potential demand to Rachelle for the cost of the final remedy. Based upon information received to date, the Company believes that any demand for the cost of the final remedy would, if made, likely be significant, although it should be substantially below the demand amount for earlier phases of the OII Site clean-up. Any demands related to the costs for the final remedy would be in addition to the amount demanded for earlier phases of the OII Site clean-up. The Company's insurer has not accepted liability although it has made payments for defense costs for the lawsuit against the Company. The Company received a letter dated September 9, 1994, from the State of California Department of Toxic Substances Control stating that it may be a PRP for the deposit of hazardous substances at a facility in Whittier, California. In June 1995, the Company joined a group of other PRPs to remove contamination from the site. The group currently estimates the total cost of the clean-up to be between $20 million and $25 million, although the actual cost could be much higher. The Company estimated that it sent 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 Page 13 of 25 additional down gradient contamination. On September 14, 1999, the Company accepted the $68,330 settlement offer, which requires EPA acceptance, and made the required payment on September 28, 1999. There can be no assurance, however, that the EPA will accept the settlement offers or what the ultimate outcome of this matter will be. The Company believes that, whatever the outcome, it will not have a material adverse effect on the Company's financial condition, results of operations or cash flows. 10. INTELLECTUAL PROPERTY RIGHTS All 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 PTO issued a decision upholding the patentability of the claims of the last of the Company's patents to be reexamined, U.S. Patent No. 5,130,767. The PTO previously issued a decision upholding the patentability of all the claims of another of the Company's MOSFET patents, its 5,008,725 patent, and issued a Notice of Intent to Issue a Reexamination Certificate. 11. LITIGATION The Company and certain of its directors and officers have been named as defendants in three class action lawsuits filed in Federal District Court for the Central District of California in 1991. These suits seek unspecified but substantial compensatory and punitive damages for alleged intentional and negligent misrepresentations and violations of the federal securities laws in connection with the public offering of the Company's common stock completed in April 1991 and the redemption and conversion in June 1991 of the Company's 9% Convertible Subordinated Debentures due 2010. They also allege that the Company's projections for growth in fiscal 1992 were materially misleading. Two of these suits also named the Company's underwriters, Kidder, Peabody & Co. Incorporated and Montgomery Securities, as defendants. On March 31, 1997, the Court, on the Company and the individual defendants' motion for summary judgment, issued the following orders: (a) the motion for summary judgment was granted as to claims brought under Sections 11 and 12(2) of the Securities Act of 1933; (b) the motion was denied as to claims brought under Section 10(b) of the Securities Exchange Act of 1934 and the Securities and Exchange Commission Rule 10b-5; and (c) the motion was granted as to the common law claims for fraud and negligent misrepresentation to the extent said claims are based on representations contained in the offering prospectus and was denied as to other such claims. The Court also granted the summary judgment motion brought by the underwriters. The plaintiffs' motion for reconsideration or certification of an interlocutory appeal of these orders was denied. On January 28, 1998, the Court decertified the class pursuing common law claims for fraud and negligent misrepresentation and granted the defendants' motion to narrow the shareholder class period to June 19, 1991 through October 21, 1991. Plaintiffs' motion for reconsideration or certification of an interlocutory appeal of these rulings was denied. On June 14, 1999, the Court approved a notice of the pendency of the class action and a proof of claim form for dissemination to class members. Such dissemination took place in June 1999. Trial is currently scheduled for March 6, 2001. Page 14 of 25 Although the Company believes that the remaining claims alleged in the suits are without merit, the ultimate outcome cannot be presently determined. A substantial judgment or settlement, if any, could have a material adverse effect on the Company's results of operations, financial position or cash flows. No provision for any liability that may result upon adjudication of these matters has been made in the consolidated financial statements. On June 22, 2000, the Company filed suit in Federal District Court in Los Angeles, California against IXYS Corporation alleging infringement of certain of the Company's U.S. patents. The suit seeks damages and other relief customary in such matters. On August 17, 2000, IXYS filed an answer and counterclaim denying infringement and alleging patent invalidity and unenforceability. Trial has been set to commence on May 8, 2001. 12. INCOME TAXES The Company's effective tax rate for the three- and six-month periods ended December 31, 2000 was 26.9% and 26.0%, respectively, which differs from the U.S. federal statutory tax rate of 35%. The lower effective tax rate reflects foreign tax credits, research and development credits, state tax credits, and lower valuation allowances, which are partially offset by higher statutory tax rates in certain foreign jurisdictions and foreign jurisdiction losses without foreign tax benefit. The Company's effective tax rate for the three- and six-month periods ended December 31, 1999 was 26.1% and 27.9%, respectively, which differs from the U.S. federal statutory tax rate of 35%. The lower effective tax rate was due primarily to lower valuation allowances, the benefit of foreign tax credits and research and development credits, partially offset by higher statutory tax rates and foreign jurisdiction losses without foreign tax benefit. Page 15 of 25 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, 2000 COMPARED WITH THE THREE- AND SIX-MONTH PERIOD ENDED DECEMBER 31, 1999 The following table sets forth certain items as a percentage of revenues.
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31 DECEMBER 31 (Unaudited) (Unaudited) ----------------------------------------------------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Revenues 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 59.3 66.0 59.8 67.1 --------------- ---------------- -------------- ---------------- Gross profit 40.7 34.0 40.2 32.9 Selling and administrative expense 12.9 15.8 13.3 16.6 Research and development expense 6.2 6.5 6.1 6.7 --------------- ---------------- -------------- ---------------- Operating profit 21.6 11.7 20.8 9.6 Net interest income (expense) 2.2 (2.3) 2.3 (2.3) Other income, net 0.0 0.4 0.0 0.2 --------------- ---------------- -------------- ---------------- Income before income taxes 23.8 9.8 23.1 7.5 Provision for income taxes 6.4 2.6 6.0 2.1 --------------- ---------------- -------------- ---------------- Net income 17.4 % 7.2 % 17.1 % 5.4 % =============== ================ ============== ================
Revenues for the three-month period ended December 31, 2000 increased 56.7% to $268.1 million from $171.1 million in the year-ago period. Revenues for the six-month period ended December 31, 2000 increased 60.1% to $517.5 million from $323.3 million a year ago. Revenues for our proprietary products (Power Integrated Circuits, Advanced Circuit Devices, and Power Systems) led the year-to-year growth in revenues. Revenues for these products increased 123% year-to-year and accounted for 31% of revenue for the second fiscal quarter. Following the recent completion of several strategic acquisitions, proprietary products are expected to account for approximately 35% of our business in the third fiscal quarter. Revenues in the current quarter period included $12.6 million of net patent royalties, versus $7.7 million in the comparable prior-year period, reflecting new license agreements and higher shipments of products covered under existing license agreements. Page 16 of 25
% Revenue by Region % Revenue by Region Three Months Ended December 31, Six Months Ended December 31, CUSTOMER REVENUE BY REGION: -------------------------------------- ------------------------------------ 2000 1999 2000 1999 ---- ---- ---- ---- North America 36% 36% 36% 37% Europe 23% 24% 23% 24% Asia Pacific 30% 31% 30% 31% Japan 11% 9% 11% 8% ------------------- ------------------ ------------------ ----------------- 100% 100% 100% 100% =================== ================== ================== =================
Customer revenue by region reflects the location where the customer takes delivery of our product. For the three- and six-month periods ended December 2000, all regions demonstrated strong year-to-year growth. Such growth was driven by a number of factors. Among them, there were significant increases across a broad range of sectors and applications, including automotive, industrial motor drives, and such information technology products as uninterruptible power supplies and servers. In the three-month period ended December 31, 2000, gross profit increased to $109.1 million (40.7% of revenues) from $58.2 million (34.0% of revenues) in the comparable year-ago quarter. Gross profit for the six-month period ended December 31, 2000 increased to $207.8 million (40.2% of revenues) from $106.4 million (32.9% of revenues) in the comparable year-ago period. The gross margin increase reflected the richer mix of more proprietary products, cost reductions and higher royalties. In the three- and six-month periods ended December 31, 2000, selling and administrative expense was $34.7 million and $68.5 million (12.9% and 13.3% of revenues), respectively, compared to $27.1 million and $53.7 million (15.8% and 16.6% 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 operating efficiencies. In the three- and six-month periods ended December 31, 2000, our research and development expenditures grew to $16.7 million and $31.6 million (6.2% and 6.1% of revenues), respectively, compared to $11.1 million and $21.7 million (6.5% and 6.7% of revenues) in the comparable prior-year periods. We expect research and development expenditures to average approximately 6% to 7% of revenue through the end of this fiscal year. With respect to current-quarter activity related to restructuring and severance charges taken in prior periods, refer to the "Notes to Unaudited consolidated financial statements - Note 7. Restructuring and Severance Charges." Net interest income increased by $9.8 million and $19.1 million in the three and six months ended December 31, 2000, respectively compared to the respective prior-year period. The increase resulted from interest income generated from higher levels of cash and short-term investments. Page 17 of 25 Net foreign currency gains and losses were less than $1.0 million in each three-month and six-month period. Our effective tax rate for the three- and six-month periods ended December 31, 2000 was 26.9% and 26.0%, respectively, which differs from the U.S. federal statutory tax rate of 35%. The lower effective tax rate reflects foreign tax credits, research and development credits, state tax credits, and lower valuation allowances, which are partially offset by higher statutory tax rates in certain foreign jurisdictions and foreign jurisdiction losses without foreign tax benefit. Our effective tax rate for the three- and six-month periods ended December 31, 1999 was 26.1% and 27.9%, respectively, which differs from the U.S. federal statutory tax rate of 35%. The lower effective tax rate was due primarily to lower valuation allowances, the benefit of foreign tax credits and research and development credits, partially offset by higher statutory tax rates and foreign jurisdiction losses without foreign tax benefit. SEASONALITY In the past, we have experienced moderate seasonality in our business. Recently, due to our rapid growth, it has been difficult to determine the effect, if any, of seasonality. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2000, we had cash and cash equivalent balances of $555.3 million and short-term investments of $279.4 million. Our short-term investment portfolio consists of fixed-income, investment-grade securities with maturities of no more than 15 months. During the six-month period ended December 31, 2000, operating activities generated cash flow of $120.1 million compared to $23.3 million in the prior-year period. Working capital increased by $1.6 million in the current six-month period as a result of our revenue growth. In addition, we showed improvements in working capital management. Days of sales outstanding declined by 9 days compared to the year-ago quarter and inventories dropped by four weeks. We invested $221.5 million in short-term investments, $45.1 million in capital equipment, and $24.7 million in new acquisitions in the six-month period. In the first half of fiscal year 2001, we acquired Lambda Advanced Analog, Inc. and the business assets of Magnitude-3 LLC, suppliers of high-value-added power management systems and technology for aerospace and other high-reliability applications. On January 5, 2001, the Company acquired Unisem, Inc., ("Unisem"), for a cash purchase price of approximately $50 million. Unisem supplies analog integrated circuits that manage power for information technology applications. At December 31, 2000, we had made purchase commitments for capital expenditures of approximately $17.3 million. Based on current market conditions and assumptions, our plan for fiscal 2001 capital expenditures is approximately $115 million, principally for fabrication and assembly capacity to meet market demand. We intend to fund capital expenditures and working capital requirements, through cash and cash equivalents on hand and anticipated cash flow from operations. Although we believe that our Page 18 of 25 current funding will be sufficient for normal operating activities, we may also consider the use of funds from other external sources, including, but not limited to, public or private offerings of debt or equity. Financing activities during the six-month period generated $540.3 million. On July 13, 2000, we successfully completed a $550 million convertible subordinated notes offering that generated net proceeds to us of $530 million (net of underwriting commissions and transaction costs). As of December 31, 2000, we had revolving, equipment and foreign credit facilities of $171.2 million, against which $11.0 million had been borrowed. For additional information on current financing activities, refer to the "Notes to Unaudited consolidated financial statements - Note 6. Bank Loans and Long-Term Debt." At December 31, 2000 our cash, cash equivalents, short-term investments and our unused credit facilities totaled $994.9 million. Three class action lawsuits have been brought against IR and its Board of Directors. See "Note 11. Litigation" for further information. Although we believe that these class action lawsuits are without merit, the ultimate outcome and the related effect on liquidity thereof cannot be presently determined. Accordingly, we have not made provision for liability, if any, that may result upon adjudication of these matters. For the possible effects of environmental matters on liquidity, see "Notes to Unaudited consolidated financial statements - Note 9. Environmental Matters." IMPACT OF THE INTRODUCTION OF THE EURODOLLAR On January 1, 1999, eleven member states of the European Union established fixed conversion rates between their existing national currency and a common currency, the "euro." Until January 1, 2002, either the euro or the participating country's present currency 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 not to exceed three months. We have initiated an internal analysis to determine the effects of the January 1, 2002 conversion. The current assessment includes the potential impact of the technical challenges to adapt information technology and other systems to accommodate euro-denominated transactions, the impact on currency exchange rate risk and currency exchange costs, and the impact on existing contracts. Based on currently available information, management does not believe that the euro conversion will have a material adverse impact on our business or financial condition. We will continue to evaluate the impact of the euro conversion. RISK MANAGEMENT At the end of June 2000, some equipment in one of our wafer fabrication lines was damaged due to a contractor error. While our facility continues to operate normally, an inspection and evaluation is underway to gauge the potential effects on the equipment and to conduct any necessary remediation. While we have experienced no material adverse effect and believe any material losses would be covered by our insurance, there can be no assurance that the Page 19 of 25 matter would not have a material and adverse effect on our business, results of operations or cash flows. RESTRUCTURING AND SEVERANCE CHARGES During June 1999, the Company recorded an $8.3 million charge related to employee severance associated with the elimination of approximately 39 positions. We completed this restructuring as of June 2000, with the actual elimination of a total of 36 positions. As of December 31, 2000, we had paid $7.0 million in termination benefits. The remaining unutilized severance accrual of $1.3 million at December 31, 2000, which is classified as current, relates to ongoing severance payments attributed to certain of those eliminated positions. Page 20 of 25 CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Form 10-Q Report contains some statements that are not historical facts but are "forward-looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements can be identified by the use of forward-looking terminology such as "anticipate," "believe," "estimate," "expect," "may," "should," "view," or "will" or the negative or other variations thereof. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Financial results are to a large extent dependent on the power MOSFET segment of the power semiconductor industry. If market demand does not continue to grow, revenue growth may be impacted, manufacturing capacity might be under-utilized, capital spending might be slowed, and Company performance might be negatively impacted. Other risks and uncertainties that could negatively impact our results include: delays in or higher-than-anticipated expenses associated with implementing planned cost reductions; the effectiveness of cost controls; the integration of acquired businesses into our Company's operations; the impact of changes in accounting methods; the impact of trade and export regulations and policies; the actual results of outstanding litigation; changes in environmental laws and regulations; delays in transferring and ramping production lines or completing customer qualifications; the accuracy of customers' forecasts; the ability of current manufacturing facilities to meet future operating needs; the actual effects of equipment damage in our wafer fabrication line described in the section entitled "Risk Management" above; product returns; changes in customers' order patterns; our mix of product shipments; the actual growth of the portable electronics industry; the continued rapid growth of demand for more efficient semiconductor components and power conversion solutions; market and sector conditions that affect our customers, licensees, and suppliers; pricing pressures; acceptance of competitors' products; introduction, acceptance, and availability of proprietary products; inability to fund capital expenditures from existing credit facilities or other external sources; the failure of suppliers and subcontractors to meet their delivery commitments to us; impact of any disruption in electricity, equipment and/or critical suppliers; unanticipated impacts on our business or financial condition due to the euro conversion; unfavorable changes in industry and competitive conditions; and general economic conditions in our markets around the world. Page 21 of 25 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to various risks, including changes in interest rates that affect our return on investments and foreign currency rate fluctuations. We do not hold or purchase any speculative foreign currency or interest rate contracts. In the normal course of business, we also face risks that are either nonfinancial or nonquantifiable. Such risks principally include country risk, credit risk and legal risk and are not discussed or quantified in the following analyses. INTEREST RATE RISK Our financial assets and liabilities that are subject to interest rate risk are our short-term investments. As of December 31, 2000, a 10% change in interest rates would not have had a material effect on our results of operations, financial position or cash flows. FOREIGN CURRENCY RISK We conduct business in various parts of the world and in various foreign currencies. We manage potential foreign currency exposure by entering into forward foreign exchange contracts or other non-speculative risk management instruments related to our foreign currency denominated receivables and payables at certain of our international subsidiaries. The gains and losses on these contracts are intended to offset changes in the related exposures. We do not hedge our foreign currency exposure in a manner that would entirely eliminate the effects of changes in foreign exchange rates on our consolidated net income. At December 31, 2000, we evaluated the effect that near-term changes in foreign exchange rates would have had on the fair value of our combined foreign currency position related to our outstanding foreign currency forward exchange contracts. If we had experienced an adverse change in foreign exchange rates of as much as 10%, the potential change in our foreign currency position would have had an immaterial effect on the results of our operations, financial position and cash flows. In fiscal 2001, we derived a large portion of our revenues from sales in foreign markets. The notional value of our foreign currency forward contracts was $39.0 million at December 31, 2000 compared to $37.4 million at June 30, 2000. The fair market value of our foreign currency forward contracts was less than $0.2 million at December 31, 2000 and $0.5 million at June 30, 2000. Net realized and unrealized foreign currency transaction gains and losses were less than $1.0 million in the three months ended December 31, 2000. Page 22 of 25 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 20, 2000 with the following results:
Authority Description of matter For Withheld --- --------- 1. Election of Directors Eric Lidow 53,025,092 568,861 Minoru Matsuda 53,230,473 363,480 James D. Plummer 53,235,435 358,518
For Against Abstentions --- ------- ----------- 2. Amendments to the 2000 Stock Incentive 35,277,327 18,022,316 294,310 Plan, principally to increase authorized shares by 3,000,000 and expand performance criteria for cash-based awards. Broker Non-Vote on Proposal 2 0 3. Ratification of PricewaterhouseCoopers 53,459,060 71,923 62,970 LLP as Independent Auditors for fiscal 2001 Broker Non-Vote on Proposal 3 0
Page 23 of 25 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Second Amendment dated November 21, 2000 The following section of Article III of the Amended and Restated Bylaws of International Rectifier Corporation is amended and restated as follows: Section 2(a): The number of directors which shall constitute the Board shall be eight (8) until changed by an amendment hereof duly adopted by the Board amending this Section 2. (b) Reports on Form 8-K 1. The Company filed a report on Form 8-K relating to "Other Events" on October 10, 2000. 2. The Company filed a report on Form 8-K relating to "Other Events" on December 8, 2000. Page 24 of 25 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 13, 2001 MICHAEL P. MCGEE ---------------------- Michael P. McGee Executive Vice President, Chief Financial Officer and Principal Accounting Officer Page 25 of 25 -----END PRIVACY-ENHANCED MESSAGE-----