-----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, RGjQ/Su5Y8NkeBoabARVzkyP+NY1p4BqxyBUKDjDOXj+n3PFI5z73qin/T7QE4us Bdc8Uyrg+qFT0Qn3/X/mIQ== 0001047469-98-041660.txt : 19981119 0001047469-98-041660.hdr.sgml : 19981119 ACCESSION NUMBER: 0001047469-98-041660 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981118 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: 98754729 BUSINESS ADDRESS: STREET 1: 233 KANSAS ST CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3103223331 10-Q 1 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 SEPTEMBER 30, 1998 --------------------------------------------- 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 51,532,002 SHARES OF THE REGISTRANT S COMMON STOCK, PAR VALUE $1.00 PER SHARE, OUTSTANDING ON NOVEMBER 16, 1998. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION PAGE REFERENCE ---------- ITEM 1. FINANCIAL STATEMENTS Unaudited Consolidated Statement of Income for the Three Month Periods Ended September 30, 1998 and 1997 2 Unaudited Consolidated Statement of Comprehensive Income for the Three Month Periods Ended September 30, 1998 and 1997 3 Consolidated Balance Sheet as of September 30, 1998 (unaudited) and June 30, 1998 4 Unaudited Consolidated Statement of Cash Flows for the Three Month Periods Ended September 30, 1998 and 1997 5 Notes to Unaudited Consolidated Financial Statements 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13 PART II. OTHER INFORMATION NONE 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 SEPTEMBER 30, ----------------------- 1998 1997 -------- -------- Revenues $127,493 $133,111 Cost of sales 91,283 88,160 -------- -------- Gross profit 36,210 44,951 Selling and administrative expense 24,207 25,348 Research and development expense 10,021 8,731 -------- -------- Operating profit 1,982 10,872 Other income (expense): Interest, net (2,451) (1,627) Other, net 518 (148) -------- -------- Income before income taxes 49 9,097 Provision for income taxes 15 3,002 -------- -------- Net income $ 34 $ 6,095 -------- -------- -------- -------- Net income per common share - Basic $ 0.00 $ 0.12 -------- -------- -------- -------- Net income per common share - Diluted $ 0.00 $ 0.12 -------- -------- -------- -------- Average common shares outstanding - Basic 51,514 51,150 -------- -------- -------- -------- Average common shares and potentially dilutive securities outstanding - Diluted 51,519 52,011 -------- -------- -------- --------
The accompanying notes are an integral part of this statement. 2 INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (IN THOUSANDS)
THREE MONTHS ENDED SEPTEMBER 30, ------------------- 1998 1997 ------ ------- Net income $ 34 $ 6,095 Other comprehensive income: Foreign currency translation adjustments 2,030 (1,904) ------ ------- Comprehensive income $2,064 $ 4,191 ------ ------- ------ -------
The accompanying notes are an integral part of this statement. 3 INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN THOUSANDS)
September 30, 1998 June 30, (unaudited) 1998 ------------- -------- ASSETS Current assets: Cash and cash equivalents $ 31,876 $ 32,294 Short-term investments -- 13,232 Trade accounts receivable, net 121,663 129,738 Inventories 129,058 130,653 Deferred income taxes 8,080 8,080 Prepaid expenses 3,967 3,253 -------- -------- Total current assets 294,644 317,250 Property, plant and equipment, net 410,561 390,892 Other assets 22,409 27,685 -------- -------- Total assets $727,614 $735,827 -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Bank loans $ 14,243 $ 28,153 Long-term debt, due within one year 38,928 37,226 Accounts payable 44,207 46,637 Accrued salaries, wages and commissions 15,713 15,875 Other accrued expenses 23,530 26,042 -------- -------- Total current liabilities 136,621 153,933 Long-term debt, less current maturities 159,902 141,528 Other long-term liabilities 16,123 29,352 Deferred income taxes 12,081 11,364 Stockholders' equity: Common stock 51,528 51,351 Capital contributed in excess of par value 256,191 255,195 Retained earnings 98,680 98,646 Accumulated other comprehensive income (3,512) (5,542) -------- -------- Total stockholders' equity 402,887 399,650 -------- -------- Total liabilities and stockholders' equity $727,614 $735,827 -------- -------- -------- --------
The accompanying notes are an integral part of this statement. 4 INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS ENDED SEPTEMBER 30, ------------------------- 1998 1997 -------- -------- Cash flow from operating activities: Net income $ 34 $ 6,095 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 11,426 9,375 Deferred income (150) (150) Deferred income taxes 656 5,713 Deferred compensation (6,241) (98) Change in working capital 5,999 (11,130) -------- -------- Net cash provided by operating activities 11,724 9,805 -------- -------- Cash flow from investing activities: Additions to property, plant and equipment (27,776) (18,975) Purchase of short-term investments - (18,000) Proceeds from sale of short-term investments 13,232 16,850 Return (investment) in other noncurrent assets 4,561 (949) -------- -------- Net cash used in investing activities (9,983) (21,074) -------- -------- Cash flow from financing activities: Proceeds from issuance of short-term bank debt, net (14,840) 10,631 Proceeds from issuance of long-term debt 38,047 140 Payments on long-term debt and obligations under capital leases (19,270) (3,869) Net proceeds from issuance of common stock 1,160 1,470 Decrease in other long-term liabilities to be financed with long-term debt (9,423) (3,074) Other 1,949 1,103 -------- -------- Net cash provided by (used in) financing activities (2,377) 6,401 -------- -------- Effect of exchange rate changes on cash and cash equivalents 218 (150) -------- -------- Net decrease in cash and cash equivalents (418) (5,018) Cash and cash equivalents beginning of period 32,294 36,564 -------- -------- Cash and cash equivalents end of period $ 31,876 $ 31,546 -------- -------- -------- --------
The accompanying notes are an integral part of this statement. 5 INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 1. BASIS OF PRESENTATION The consolidated financial statements included herein are unaudited, however, they contain all normal recurring accruals which, in the opinion of management, are necessary to present fairly the consolidated financial position of the Company at September 30, 1998 and the consolidated results of operations and cash flows for the three month periods ended September 30, 1998 and 1997. It should be understood that accounting measurements at interim dates inherently involve greater reliance on estimates than at year end. The results of operations for the three month period ended September 30, 1998 are not necessarily indicative of the results to be expected for the full year. The accompanying consolidated financial statements do not include footnotes and certain financial presentations normally required under generally accepted accounting principles and, therefore, should be read in conjunction with the Annual Report on Form 10-K for the year ended June 30, 1998. Effective July 1, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income", and accordingly has included a separate statement of comprehensive income following the Company's Consolidated Statement of Income. Comprehensive income generally represents all changes in shareholders' equity during the period except those resulting from investments by, or distributions to, shareholders. The balance of accumulated other comprehensive income at September 30, 1998 consists of accumulated foreign currency translation adjustments. 2. NET INCOME PER COMMON SHARE Net income per common share - Basic is computed by dividing net income available to common shareholders (the numerator) by the weighted average number of common shares outstanding (the denominator) during the period. The computation of net income per common share - Diluted is similar to the computation of net income per common share - Basic except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. The following table provides a reconciliation of the numerator and denominator of the basic and diluted per-share computations for the three months ended September 30, 1998 and 1997 (in thousands except per share amounts):
NET INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- --------- Three Months ended September 30, 1998 Net income per common share - Basic... $ 34 51,514 $ 0.00 Effect of dilutive securities: Stock options ..................... 5 ----------------------------------------- Net income per common share - Diluted.... $ 34 51,519 $ 0.00 ----------------------------------------- -----------------------------------------
6
NET INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- --------- Three Months ended September 30, 1997 Net income per common share - Basic... $ 6,095 51,150 $ 0.12 Effect of dilutive securities: Stock options...................... 861 -------- ------ ------- Net income per common share - Diluted.... $ 6,095 52,011 $ 0.12 -------- ------ ------- -------- ------ -------
3. INVENTORIES Inventories are stated at the lower of cost (principally first-in, first-out) or market. Inventories at September 30, 1998 (unaudited) and June 30, 1998 were comprised of the following (in thousands):
SEPTEMBER 30, 1998 JUNE 30, 1998 ------------------ ------------- Raw materials $ 18,598 $ 21,101 Work-in-process 57,557 56,224 Finished goods 52,903 53,328 -------- --------- $129,058 $ 130,653 -------- --------- -------- ---------
4. LONG-TERM DEBT AND OTHER LOANS On August 28, 1998, the Company replaced an existing $2.5 million revolving line of credit with a new $24.9 million unsecured credit facility, both with the same foreign bank. The new agreement provides the Company with a five-year $8.3 million revolving line of credit, and a five-year $16.6 million term-loan facility, with principal retirements beginning after 30 months. The interest rate on both facilities is based on 1% above the applicable LIBOR rate. A summary of the Company's long-term debt and other loans at September 30, 1998 is as follows (in thousands):
SEPTEMBER 30, 1998 ------------- Capitalized lease obligations payable in varying monthly installments primarily at rates from 6.0% to 10.7% $ 489 Domestic bank loans collateralized by equipment, payable in varying monthly installments at rates from 6.4% to 8.7%, due in 1999 through 2004 46,913 Domestic unsecured bank loans payable in varying monthly installments at rates from 6.3% to 6.5%, due in 2000 through 2003 109,339 Foreign bank loans collateralized by property and/or equipment, payable in varying monthly installments at rates from 6.4% to 10.8%, due in 1998 through 2003 25,783 Foreign unsecured bank loans payable in varying monthly installments at rates from 2.6% to 8.4%, due in 1999 through 2006 16,306 -------- 198,830 Less current portion of long-term debt (38,928) -------- $159,902 -------- --------
7 5. IMPAIRMENT OF ASSETS AND RESTRUCTURING CHARGE During the fourth quarter of fiscal 1997, the Company recorded a $75 million pretax charge related to a restructuring program designed to improve the Company's competitive position and further accelerate growth and earnings by streamlining operations and administration. The charge was composed of $65 million for the write-down of assets and $10 million for termination benefits to be paid in connection with the elimination of approximately 150 positions. As of September 30, 1998, the Company had recorded $65 million in non-cash asset write-offs and paid $7.7 million for termination benefits relating to the restructuring program. The remaining unutilized restructuring accrual of $2.3 million relates to positions that have been or will be eliminated during the rest of fiscal year 1999. 6. 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. The year 1998, for example is represented in such a two digit system as "98". Beginning in the year 2000, these systems will need to be modified to distinguish 21st century dates from 20th century dates. As a result, computer systems and/or software used by many companies may need to be adapted to meet these requirements. The disclosures contained herein are Year 2000 statements and constitute a Year 2000 Readiness Disclosure under Public Law No. 105-271. The Company has adopted the definition of Year 2000 conformity published by the British Standards Institute (BSI) as DISC PD2000-1. The adoption of this standard as a target for compliance does not guarantee that the Company's products or operations will be in full Year 2000 conformity as detailed in this definition. Currently, none of the Company's products contain date processing logic. The Company therefore represents to purchasers that its products are Year 2000 compliant pursuant to the BSI DISC PD2000-1 definition. The Company has established a Global Year 2000 Team as well as local site teams. Both the Global and the local site teams consist of management as well as operational and information technology staff members. The Global 2000 Team was formed to address company-wide Year 2000 issues, such as overall project integration and management, project schedules, and reporting to management. Local site teams address research and remediation for site specific equipment, facilities and suppliers. Both the Global and local site teams are divided into the following functional areas: (1) factory equipment and facilities, (2) customers, suppliers and business partners, (3) desktop and network hardware and software systems, and (4) mid-range computer and manufacturing systems. Worldwide, the Company currently employs approximately 70 employees that are addressing the Year 2000 issue, 20 of whom are engaged in this 8 effort on a full-time basis. The Company has currently budgeted $5.0 million for the cost of investigation and remediation for the period August, 1997 to March, 2000. The budget includes staff salaries and remediation expenses. Through September 30, 1998 the Company has spent $1.8 million of this budget. International Rectifier prioritized efforts to prepare its systems for Year 2000 based on the importance of each system to the Company's operations and the potential impact of non-compliance. The Company plans to remediate its systems in phases, first establishing an inventory and then assessing, correcting, testing, and certifying compliance. Remediation efforts are underway with a milestone of May, 1999 by which corrective action for critical items are to be completed. Non-critical systems are scheduled to be corrected on or before November 30, 1999. There can be no assurance, however, that serious and complicated remediation problems will not arise during the remainder of the project. The Company is currently surveying its suppliers and business partners, including banks and other financial institutions with whom the Company engages in integrated transactions, regarding whether they are Year 2000 compliant. The Company has also begun site visits to its key suppliers. The survey and site visits are not yet complete and, accordingly, the Company is currently unable to evaluate the extent to which such entities may be Year 2000 compliant and the effect that their non-compliance might have on the Company. The Company has established programs to ensure that current and future purchases of equipment and software are Year 2000 compliant pursuant to the BSI DISC PD2000-1 definition. The Company is developing contingency plans in the event the Company or its significant customers, suppliers or vendors are not Year 2000 compliant by January 1, 2000. There can be no assurance that the Company will be able to develop contingency plans that will adequately address every issue that may arise in the year 2000. Embedded microprocessors that regulate the basic infrastructure in various Company facilities may fail. The software that controls manufacturing processes may fail and shut down assembly or packaging. The computers used in business and office operations may fail at the desktop or network level. On a broader scale, communication and power distribution may be disrupted, financial institutions may experience difficulties that prevent access to or the transfer of funds, and the transportation network, water supply and food distribution may be affected, negatively impacting employees. Based on currently available information, management does not believe that the Year 2000 matters discussed above will have a material adverse impact on the Company's financial condition or results of operations. However, because of the uncertainties in this area, no assurances can be given in this regard. The Company is subject to external forces that might generally affect industry and commerce, such as utility or transportation infrastructure failures and interruptions. Supply chains and delivery 9 shipments could be disrupted for an unknown period of time. In addition, the failure by a supplier, customer or another third party to ensure Year 2000 capability could have a material adverse effect on the Company. The costs of the project and the dates on which the Company believes it will complete Year 2000 remediation and modifications are based on management's best estimates, which were based on assumptions of future events, including the continued availability of certain resources, third-party modifications, plans, and other factors. There can be no assurance that these estimates will be achieved, and actual results could differ materially from those anticipated. 10 7. EXECUTIVE AGREEMENT The Company entered into an executive agreement with Eric Lidow dated May 15, 1991. The agreement set Mr. Lidow's annual salary at $500,000, granted the Board discretion to increase his salary and to pay him bonuses, and established a pension. Mr. Lidow's salary was increased in May 1992 to $550,000 and in August 1994 to $632,500. Mr. Lidow was not awarded a bonus in fiscal year 1998. The agreement may be terminated by either party upon 90 days written notice. Under the Agreement, prior to its amendment described below, Mr. Lidow would have been entitled to begin receiving the pension payments when his employment with the Company ceased for any reason (except termination for cause). The pension would have been payable in annual installments, equal to the sum of 90% of his then current salary and the average of his prior three years' cash bonuses, if any. If Mr. Lidow's wife survived him, she would have received for the remainder of her life, annual payments in an amount equal to two-thirds of the amount of the pension payment that would have been payable to Mr. Lidow. Before the amendments to the agreement described below, if Mr. Lidow had retired at fiscal year end, the pension would have been equal to $821,250 per year for the remainder of Mr. Lidow's life and $574,500 per year for the remainder of Mrs. Lidow's life, if she had survived him. The Company had funded a trust to cover its liability for the pension based on actuarial assumptions established by Coopers & Lybrand L.L.P. However, the Company's actual liability for the pension in ensuing years could have been more or less than the funding depending upon whether actual events mirrored the actuarial assumptions. In 1998, the Company's Compensation Committee and Mr. Lidow renegotiated his executive agreement by eliminating the pension provisions referred to above. The Compensation Committee then recommended adoption of the renegotiated agreement by the Board. In making its recommendation to the Board, the Compensation Committee considered, among other things, its and Mr. Lidow's desire to limit the sale of his shares of IR Common Stock to meet commitments and its concerns about the uncertainty of the Company's liability for the pension. In connection with the former consideration, the Company also made certain loans to Mr. Lidow, which have since been repaid. See "Related Party Transactions". Amendments were thereafter made to 11 the agreement that cancelled all of the Company's obligations with respect to the pension. As consideration, the corpus of the trust of $8,096,663 was distributed to Mr. Lidow in several installments, $1,500,000 of which was distributed to Mr. Lidow in fiscal 1998. Based on actuarial analysis, the consideration was less than the amount needed to purchase the retirement benefit from a third party company. Mr. Lidow and his wife are no longer entitled to receive any payments under the agreement after Mr. Lidow's employment with the Company ceases. The funding of the pension had been expensed in prior years, and the lump sum distribution did not trigger any further expense. Because Internal Revenue Code Section 162(m) imposes certain restrictions on the deductibility of non-performance based compensation in excess of $1,000,000, the Company will not be able to deduct any compensation in excess of $1,000,000 paid to Mr. Lidow in fiscal 1998 and may not be able to deduct any such amount in fiscal 1999. 8. RELATED PARTY TRANSACTIONS In June 1998, after discussing with Eric Lidow his desire to limit the sale of shares of IR Common Stock to meet commitments, the Board approved two unsecured loans to him aggregating $1,200,000, with interest at the annual rate of eight and one-half percent (8.5%). The loans were disbursed in two installments of $600,000, in June and July 1998. Both loans were due December 31, 1998, and on September 23, 1998, Mr. Lidow repaid them with accrued interest of $23,497. Contemporaneously, the Company amended his executive agreement. See "Executive Agreement." 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1998 COMPARED WITH THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1997 The following table sets forth certain items as a percentage of revenues.
THREE MONTHS ENDED SEPTEMBER 30, (UNAUDITED) -------------------- 1998 1997 ----- ------ Revenues 100.0% 100.0% Cost of sales 71.6 66.2 ----- ----- Gross profit 28.4 33.8 Selling and administrative expense 19.0 19.0 Research and development expense 7.9 6.6 ----- ----- Operating profit 1.5 8.2 Interest expense, net (1.9) (1.2) Other income (expense), net 0.4 (0.1) ----- ----- Income before income taxes 0.0 6.9 Provision for income taxes 0.0 2.3 ----- ----- Net income 0.0% 4.6% ----- ----- ----- -----
Revenues for the three months ended September 30, 1998 decreased 4.2% to $127.5 million from $133.1 million in the prior year period. Unit shipments increased by 21 percent year-to-year, indicating strong growth in applications for products, as well as continued gains in market share. Revenues in the current quarter included $4.4 million of net patent royalties, versus $4.5 million in the prior year period. September-quarter gross margin was 28.4% of revenues ($36.2 million) compared to 33.8% of revenues ($45.0 million) for the year-ago quarter. The year-to-year decline in revenues and gross margin primarily reflected lower prices. September-quarter selling and administrative expense was $24.2 million (19.0% of revenues) versus $25.3 million (19.0% of revenues) in the comparable year-ago quarter. In the quarter ended September, the Company's research and development expenditures increased to $10.0 million (7.9% of revenues) compared to $8.7 million (6.6% of revenues) in the comparable prior year period. Net interest expense was $2.5 million compared to $1.6 million in the prior year period, reflecting increased interest expense incurred on higher average debt balances and a decrease in interest income. 13 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 September 30, 1998, the Company maintained cash and cash equivalent balances of $31.9 million. In addition, the Company had established $60.2 million of domestic and foreign revolving lines of credit, against which $34.2 million had been borrowed. The Company had unused capital equipment credit lines of $63 million. However, due to covenant limitations, the total amount the Company had available for borrowing at September 30, 1998 was $27.8 million. At September 30, 1998, the Company had made purchase commitments for capital equipment of approximately $6.7 million. The Company intends to fund operations and planned capital expenditures through cash and cash equivalents on hand, short-term investments, anticipated cash flow from operations, and funds from existing or additional credit facilities. However, 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. RECENT ACCOUNTING PRONOUNCEMENTS On June 30, 1997, the FASB issued SFAS No.131 "Disclosures about Segments of an Enterprise and Related Information." SFAS No.131 requires publicly-held companies to report financial and descriptive information about its operating segments in financial statements issued to shareholders for interim and annual periods. The statement also requires additional disclosures with respect to products and services, geographic areas of operation, and major customers. SFAS 131 is effective for fiscal years beginning after December 15, 1997 and requires restatement of earlier periods presented. Management is currently evaluating the impact, if any, of SFAS 131. In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS 132 supersedes the disclosure requirements for SFAS No. 87 "Employers' Accounting for Pensions," SFAS No. 88 "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans," and SFAS No. 106 "Employers' Accounting for Postretirement Benefits Other than Pensions." This Statement is effective for fiscal years beginning after December 15, 1997. Management does not believe that this pronouncement will have a material impact on the notes to the financial statements. In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." SFAS 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 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Management is currently evaluating the impact, if any, of SFAS 133. 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. The year 1998, for example is represented in such a two digit system as "98". Beginning in the year 2000, these systems will need to be modified to distinguish 21st century dates from 20th century dates. As a result, computer systems and/or software used by many companies may need to be adapted to meet these requirements. The disclosures contained herein are Year 2000 statements and constitute a Year 2000 Readiness Disclosure under Public Law No. 105-271. The Company has adopted the definition of Year 2000 conformity published by the British Standards Institute (BSI) as DISC PD2000-1. The adoption of this standard as a target for compliance does not guarantee that the Company's products or operations will be in full Year 2000 conformity as detailed in this definition. Currently, none of the Company's products contain date processing logic. The Company therefore represents to purchasers that its products are Year 2000 compliant pursuant to the BSI DISC PD2000-1 definition. The Company has established a Global Year 2000 Team as well as local site teams. Both the Global and the local site teams consist of management as well as operational and information technology staff members. The Global 2000 Team was formed to address company-wide Year 2000 issues, such as overall project integration and management, project schedules, and reporting to management. Local site teams address research and remediation for site specific equipment, facilities and suppliers. Both the Global and local site teams are divided into the following functional areas: (1) factory equipment and 14 facilities, (2) customers, suppliers and business partners, (3) desktop and network hardware and software systems, and (4) mid-range computer and manufacturing systems. Worldwide, the Company currently employs approximately 70 employees that are addressing the Year 2000 issue, 20 of whom are engaged in this effort on a full-time basis. The Company has currently budgeted $5.0 million for the cost of investigation and remediation for the period August, 1997 to March, 2000. The budget includes staff salaries and remediation expenses. Through September 30, 1998 the Company has spent $1.8 million of this budget. International Rectifier prioritized efforts to prepare its systems for Year 2000 based on the importance of each system to the Company's operations and the potential impact of non-compliance. The Company plans to remediate its systems in phases, first establishing an inventory and then assessing, correcting, testing, and certifying compliance. Remediation efforts are underway with a milestone of May, 1999 by which corrective action for critical items are to be completed. Non-critical systems are scheduled to be corrected on or before November 30, 1999. There can be no assurance, however, that serious and complicated remediation problems will not arise during the remainder of the project. The Company is currently surveying its suppliers and business partners, including banks and other financial institutions with whom the Company engages in integrated transactions, regarding whether they are Year 2000 compliant. The Company has also begun site visits to its key suppliers. The survey and site visits are not yet complete and, accordingly, the Company is currently unable to evaluate the extent to which such entities may be Year 2000 compliant and the effect that their non-compliance might have on the Company. The Company has established programs to ensure that current and future purchases of equipment and software are Year 2000 compliant pursuant to the BSI DISC PD2000-1 definition. The Company is developing contingency plans in the event the Company or its significant customers, suppliers or vendors are not Year 2000 compliant by January 1, 2000. There can be no assurance that the Company will be able to develop contingency plans that will adequately address every issue that may arise in the year 2000. Embedded microprocessors that regulate the basic infrastructure in various Company facilities may fail. The software that controls manufacturing processes may fail and shut down assembly or packaging. The computers used in business and office operations may fail at the desktop or network level. On a broader scale, communication and power distribution may be disrupted, financial institutions may experience difficulties that prevent access to or the transfer of funds, and the transportation network, water supply and food distribution may be affected, negatively impacting employees. Based on currently available information, management does not believe that the Year 2000 matters discussed above will have a material adverse impact on the Company s financial condition or results of operations. However, because of the uncertainties in this area, no assurances can be given in this regard. The Company is subject to external forces that might generally affect industry and commerce, such as utility or transportation infrastructure 15 failures and interruptions. Supply chains and delivery shipments could be disrupted for an unknown period of time. In addition, the failure by a supplier, customer or another third party to ensure Year 2000 capability could have a material adverse effect on the Company. The costs of the project and the dates on which the Company believes it will complete Year 2000 remediation and modifications are based on management's best estimates, which were based on assumptions of future events, including the continued availability of certain resources, third-party modifications, plans, and other factors. There can be no assurance that these estimates will be achieved, and actual results could differ materially from those anticipated. 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 and that 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, capacity installed might be under-utilized, capital spending may be slowed, and Company performance may be negatively impacted. Other risks and uncertainties that could negatively impact Company results include: risk of nonpayment of accounts receivable; risk of inventory obsolescence due to shifts in market demand; an increased rate of customer inventory adjustment; deferral of delivery dates, cancellations and returns; development and acceptance of new products and price pressures; availability and pricing of competitors' products; lower manufacturing yields; risks associated with foreign operations and foreign currency fluctuations; adverse results in litigation involving intellectual property; environmental claims; shareholder lawsuits; the successful implementation of the Company's announced restructuring program; the availability of cost effective sources of financing; and business and general economic conditions in the Company's markets around the world. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERNATIONAL RECTIFIER CORPORATION ----------------------------------- Registrant November 18, 1998 MICHAEL P. MCGEE ---------------------------- Michael P. McGee Vice President, Chief Financial Officer and Principal Accounting Officer 17 PART II. OTHER INFORMATION None 18 EX-27 2 EXHIBIT 27
5 1,000 3-MOS JUL-04-1999 JUL-06-1998 OCT-04-1998 31,876 0 123,763 (1,579) 129,058 294,644 632,170 (271,609) 727,614 136,621 0 0 0 51,528 351,359 727,614 127,493 127,493 91,283 91,283 34,228 87 2,451 49 15 34 0 0 0 34 0.00 0.00
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