-----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, R0cPOyl2X84yUftQQ2SG9EKPiuiybARxcW/hi3kPBQfvkO2TudnRNl5kc3P8NPin 6+Gz9FHFZzU39fy406vW7g== 0001047469-99-036749.txt : 19990927 0001047469-99-036749.hdr.sgml : 19990927 ACCESSION NUMBER: 0001047469-99-036749 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990924 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/A SEC ACT: SEC FILE NUMBER: 001-07935 FILM NUMBER: 99716706 BUSINESS ADDRESS: STREET 1: 233 KANSAS ST CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3103223331 10-Q/A 1 10-Q/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A (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, 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 51,707,700 SHARES OF THE REGISTRANT'S COMMON STOCK, PAR VALUE $1.00 PER SHARE, OUTSTANDING ON FEBRUARY 16, 1999. SEC AMENDMENT - FORM 10Q/A EXPLANATORY NOTE This amendment no. 1 to the Company's report on Form 10-Q for its quarter ended December 31, 1998, is being filed to include additional disclosures for Items 1 and 2. Both items have been amended to include additional disclosure of the Impairment of Assets and Restructuring Charges sections. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION
PAGE REFERENCE --------- ITEM 1. FINANCIAL STATEMENTS Unaudited Consolidated Statement of Income for the Three- and Six-Month Periods Ended December 31, 1998 and 1997 2 Unaudited Consolidated Statement of Comprehensive Income for the Three- and Six-Month Periods Ended December 31, 1998 and 1997 3 Consolidated Balance Sheet as of December 31, 1998 (unaudited) and June 30, 1998 4 Unaudited Consolidated Statement of Cash Flows for the Six-Month Periods Ended December 31, 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 ITEM 3. LEGAL PROCEEDINGS 21 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21
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, ----------------------------- ----------------------------- 1998 1997 1998 1997 ---------- ----------- ----------- ----------- Revenues $ 132,837 $ 144,622 $ 260,330 $ 277,733 Cost of sales 96,684 96,772 187,967 184,932 ----------- ----------- ----------- ----------- Gross profit 36,153 47,850 72,363 92,801 Selling and administrative expense 24,398 26,988 48,605 52,336 Research and development expense 10,397 8,778 20,418 17,509 Restructuring charge 12,000 - 12,000 - ----------- ----------- ----------- ----------- Operating profit (loss) (10,642) 12,084 (8,660) 22,956 Other income (expense): Interest, net (2,905) (1,933) (5,356) (3,560) Other, net 43,829 (153) 44,347 (301) ----------- ----------- ----------- ----------- Income before income taxes 30,282 9,998 30,331 19,095 Provision for income taxes 10,488 3,299 10,503 6,301 ----------- ----------- ----------- ----------- Net income $ 19,794 $ 6,699 $ 19,828 $ 12,794 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net income per common share Basic $ 0.38 $ 0.13 $ 0.38 $ 0.25 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Diluted $ 0.38 $ 0.13 $ 0.38 $ 0.25 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Average common shares and potentially dilutive securities outstanding Basic 51,532 51,191 51,523 51,171 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Diluted 51,691 51,616 51,605 51,814 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of this statement. 2 INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, ----------------------------- ----------------------------- 1998 1997 1998 1997 ---------- ----------- ----------- ----------- Net income $ 19,794 $ 6,699 $ 19,828 $ 12,794 Other comprehensive income (loss): Foreign currency translation adjustments (53) 474 1,977 (1,430) ---------- ----------- ----------- ----------- Comprehensive income $ 19,741 $ 7,173 $ 21,805 $ 11,364 ---------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
The accompanying notes are an integral part of this statement. 3 INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN THOUSANDS)
DECEMBER 31, 1998 JUNE 30, (UNAUDITED) 1998 ------------ ----------- ASSETS Current assets: Cash and cash equivalents $ 22,858 $ 32,294 Short-term investments 4,000 13,232 Trade accounts receivable, net 115,756 129,738 Inventories 114,466 130,653 Deferred income taxes 7,380 8,080 Prepaid expenses and other receivables 47,924 3,253 -------- -------- Total current assets 312,384 317,250 Property, plant and equipment, net 409,290 390,892 Other assets 26,089 27,685 -------- -------- Total assets $747,763 $735,827 -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Bank loans $ 16,493 $ 28,153 Long-term debt, due within one year 37,635 37,226 Accounts payable 43,255 46,637 Accrued salaries, wages and commissions 13,660 15,875 Other accrued expenses 39,572 26,042 -------- -------- Total current liabilities 150,615 153,933 Long-term debt, less current maturities 140,978 141,528 Other long-term liabilities 20,383 29,352 Deferred income taxes 13,116 11,364 Stockholders' equity: Common stock 51,532 51,351 Capital contributed in excess of par value 256,230 255,195 Retained earnings 118,474 98,646 Accumulated other comprehensive loss (3,565) (5,542) -------- -------- Total stockholders' equity 422,671 399,650 -------- -------- Total liabilities and stockholders' equity $747,763 $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)
SIX MONTHS ENDED DECEMBER 31, --------------------------- 1998 1997 ------------- ----------- Cash flow from operating activities: Net income $ 19,828 $ 12,794 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 23,285 19,257 Deferred income (300) (300) Deferred income taxes 2,444 9,590 Deferred compensation (6,193) (213) Restructuring charge 14,500 - Change in working capital (13,978) (5,588) -------- -------- Net cash provided by operating activities 39,586 35,540 -------- -------- Cash flow from investing activities: Additions to property, plant and equipment (38,468) (46,036) Purchase of short-term investments (4,000) (33,000) Proceeds from sale of short-term investments 13,232 34,850 Change in other noncurrent assets 336 (1,529) -------- -------- Net cash used in investing activities (28,900) (45,715) -------- -------- Cash flow from financing activities: Proceeds from issuance of (payments on) short-term bank debt, net (12,964) 10,192 Proceeds from issuance of long-term debt 42,443 9,017 Payments on long-term debt and obligations under capital leases (43,352) (8,595) Net proceeds from issuance of common stock 1,216 1,592 Decrease in other long-term liabilities to be financed with long-term debt (7,511) (3,236) Other (694) 1,745 -------- -------- Net cash provided by (used in) financing activities (20,862) 10,715 -------- -------- Effect of exchange rate changes on cash and cash equivalents 740 (198) -------- -------- Net increase (decrease) in cash and cash equivalents (9,436) 342 Cash and cash equivalents beginning of period 32,294 36,564 -------- -------- Cash and cash equivalents end of period $ 22,858 $ 36,906 -------- -------- -------- --------
The accompanying notes are an integral part of this statement. 5 INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 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 December 31, 1998 and the consolidated results of operations and cash flows for the six-month periods ended December 31, 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 six-month period ended December 31, 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. The Company operates on a fiscal calendar under which the six months ended December 31, 1998 consisted of 26 weeks compared to 27 weeks in the six months ended December 31, 1997. 2. NET INCOME PER COMMON SHARE Net income per common share - Basic is computed by dividing net income available to common shareholders (the numerator) by the weighted average number of common shares outstanding (the denominator) during the period. The computation of net income per common share - Diluted is similar to the computation of net income per common share - Basic except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. The following table provides a reconciliation of the numerator and denominator of the Basic and Diluted per-share computations for the three- and six-month periods ended December 31, 1998 and 1997 (in thousands except per share amounts): 6
Net Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ---------- Three Months ended December 31, 1998 Net income per common share - Basic... $ 19,794 51,532 $ 0.38 Effect of dilutive securities: Stock options..................... 159 ------------------------------------------------------ Net income per common share - Diluted.... $ 19,794 51,691 $ 0.38 ------------------------------------------------------ ------------------------------------------------------ Net Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ---------- Three Months ended December 31, 1997 Net income per common share - Basic... $ 6,699 51,191 $ 0.13 Effect of dilutive securities: Stock options..................... 425 ------------------------------------------------------ Net income per common share - Diluted.... $ 6,699 51,616 $ 0.13 ------------------------------------------------------ ------------------------------------------------------ Net Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ---------- Six Months ended December 31, 1998 Net income per common share - Basic... $ 19,828 51,523 $ 0.38 Effect of dilutive securities: Stock options..................... 82 ------------------------------------------------------ Net income per common share - Diluted.... $ 19,828 51,605 $ 0.38 ------------------------------------------------------ ------------------------------------------------------ Net Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ---------- Six Months ended December 31, 1997 Net income per common share - Basic... $ 12,794 51,171 $ 0.25 Effect of dilutive securities: Stock options..................... 643 ------------------------------------------------------ Net income per common share - Diluted.... $ 12,794 51,814 $ 0.25 ------------------------------------------------------ ------------------------------------------------------
3. INVENTORIES Inventories are stated at the lower of cost (principally first-in, first-out) or market. Inventories at December 31, 1998 and June 30, 1998 (audited) were comprised of the following (in thousands):
DECEMBER 31, 1998 JUNE 30, 1998 ----------------- ------------- Raw materials $ 16,736 $ 21,101 Work-in-process 51,685 56,224 Finished goods 46,045 53,328 -------- -------- 7 $114,466 $130,653 -------- -------- -------- --------
4. LONG-TERM DEBT AND OTHER LOANS A summary of the Company's long-term debt and other loans at December 31, 1998 is as follows (in thousands):
DECEMBER 31, 1998 ------------ Capitalized lease obligations payable in varying monthly installments primarily at rates from 7.5% to 10.7% $ 103 Domestic bank loans collateralized by equipment, payable in varying monthly installments at rates from 5.8% to 8.7%, due in 1999 through 2004 43,953 Domestic unsecured bank loans payable in varying monthly installments at rates from 5.7% to 6.0%, due in 2000 through 2003 92,608 Foreign bank loans collateralized by property and/or equipment, payable in varying monthly installments at rates from 6.0% to 10.8%, due in 1999 through 2000 333 Foreign unsecured bank loans payable in varying monthly installments at rates from 4.3% to 8.4%, due in 2000 through 2006 41,616 -------- 178,613 Less current portion of long-term debt (37,635) -------- $140,978 -------- --------
5. IMPAIRMENT OF ASSETS AND RESTRUCTURING CHARGES Due to a continuous decline in selling prices for its MOSFET and IGBT products, 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 cost structure. Specifically, the restructuring activities included shifting production from older manufacturing facilities to newer, more efficient facilities, changing business processes by consolidating order entry, customer support, inventory management, information systems and finance activities at fewer locations and accelerating the deployment of the Company's new product development center. The restructuring activities were expected to reduce the cost of the Company's business processes and lower product costs and result in increased flow of new products, which are less price sensitive. The charge was composed of $61 million for the write-down of assets, $4 million for the write-down of inventory, primarily wafers, to net realizable value and $10 million for termination benefits to be paid in connection with the severed employees. The restructuring activities occurred over an eighteen-month transition period through December 31, 1998. The asset write-down of property and equipment of $61 million was determined by comparing the expected future undiscounted cash flows to the respective asset carrying value. If an asset was deemed to be impaired, the carrying value was adjusted to its expected future discounted cash flows. The net book value of the applicable property and equipment prior to the $61 million write-down was $79 million. The write-downs related to the following: 1) Wafer fabrication equipment located in El Segundo, California with a carrying value of $21 million, was adjusted to its fair value of $2 million. One wafer fabrication line, dedicated primarily to research and product development, was abandoned and replaced by a new product development facility in August 1998. The other wafer fabrication line, which manufactured product using equipment that processed 4-inch wafers, was abandoned and replaced with a more advanced line located in Italy, which processes 5-inch wafers, in August 1998. Using 5-inch wafers results in significant manufacturing savings. The current status of the wafer fabrication impaired equipment falls into three categories: a) it was scrapped as of June 1997, b) it is idle with no viable plans for usage, or c) it is being used on a sporadic basis in research and development. There is no viable external market for this equipment. 2) Assembly equipment in England of $26 million was adjusted to its fair value of $4 million. Specifically, three product assembly and packaging lines in England were operating at a gross margin loss. The Company has continued to utilize these lines periodically for market development activities, and these lines remain unprofitable. 3) Information systems applications with a carrying value of $32 million were written down to $12 million as a result of lack of vendor support. The Company's software vendor changed business strategies and informed the Company of its intention to stop supporting and developing the software technology that certain of the Company's information systems applications were based upon. It was determined in June 1997, that no viable alternatives could be identified. As a result of this decision, the Company ceased development and implementation of certain forecasting, planning and order management programs and determined the assets related to these specific activities were impaired (i.e., no future use and were abandoned). These assets consisted of costs related to external consulting fees and expenses. The remaining book value relates to modules that have not been abandoned. As of December 31, 1998, the Company had eliminated approximately 221 employees related to the June 1997 restructuring. The majority of the positions eliminated were operators and technicians at the Company's North American operations. The Company also eliminated production and assembly positions in its manufacturing operations in Italy due to the outsourcing of certain production and assembly activities. In addition, administrative and sales positions in France, England, Germany, Japan and North America, related to the regional consolidation of certain administrative functions, were eliminated. As of December 31, 1998, the Company had incurred $65 million in non-cash asset writeoffs and paid $9 million for termination benefits. The remaining unutilized restructuring accrual of $1.0 million relates to severance payments to previously notified employees for positions that were scheduled to be eliminated during the remainder of fiscal year 1999. The majority of these remaining positions were eliminated in the last week of January and the first week of February 1999. During December, 1998, 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, and to centralize more of its European customer service and administrative activities resulting in reductions in personnel. The Company expects to complete this operational transition over the next eighteen months. The charge consisted of $5.9 million for estimated severance costs associated with the elimination of approximately 350 positions, primarily consisting of operators and technicians, $6.1 million for the write-off of assets to be abandoned, and $2.5 million for the write-down of inventory related to specialty product lines. The Company estimates that, ultimately, charges associated with these actions will total approximately $19.5 million, and the Company expects to recognize the final charge of approximately $5.0 million, relating to additional severance costs, in the third quarter of fiscal 1999, after proper notification to these additional affected employees. None of the assets written down, consisting primarily of building improvements relating to the high volume assembly production lines, and production information systems, will remain in use and will be abandoned after the production lines are relocated. 8 6. YEAR 2000 READINESS See "Year 2000 Readiness" in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7. ENVIRONMENTAL MATTERS Federal, state, and local laws and regulations impose various restrictions and controls on the discharge of certain materials, chemicals, and gases used in semiconductor manufacturing processes. In addition, 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 and Rachelle Laboratories, Inc. ("Rachelle"), a former subsidiary of the Company which discontinued operations in 1986, were each named a potentially responsible party ("PRP") in connection with the United States Environmental Protection Agency's ("EPA") investigation 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 lawsuit against the Company, relating to the first and second consent decrees, was settled in August 1993 for the sum of $40,000, to avoid protracted and expensive litigation. The Company recently settled the EPA's claims against the Company for the clean-up of the OII Site for a payment of $173,580, less a credit of $40,000 for the prior settlement payment, for a net payment of $133,580. The Company also received a letter dated July 25, 1995 from the U.S. Department of Justice, directed to Rachelle, offering to settle claims against Rachelle relating to the first 9 elements of clean-up work at the 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. The Company has received no further communications in connection with the Supplemental Information Request. 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 was hazardous. 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, if made, while likely to be significant, should nonetheless be substantially below the demand amount 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 also 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 January 18, 1999, the group proposed to settle a portion of the Company's clean-up obligations for $34,000 to $67,800, though the Company would remain liable for certain future costs after the settlement. The Company did not accept the offer, and it cannot predict if or when it will settle the claims. 8. INTELLECTUAL PROPERTY RIGHTS Certain of the Company's fundamental power MOSFET patents have been, and continue to be, subjected to reexamination in the United States Patent and Trademark Office ("PTO"). The PTO has concluded its reexamination of the Company's U.S. patents 4,642,666 and 4,959,699 and has issued reexamination certificates confirming the patentability of claims of those patents. The Company's 5,008,725 and 5,130,767 patents are currently undergoing reexamination in the PTO. 9. LITIGATION In January 1998, the Company filed suit against Samsung Semiconductor, Inc. and Samsung Electronics Co., Ltd., alleging infringement of certain of the Company's U.S. patents. In December 1998, the Company filed a second suit against the Samsung 10 entities alleging infringement of additional U.S. patents of the Company. On December 31, 1998, the Company entered into an agreement with the Samsung entities settling all past infringement claims and providing the Samsung entities with a short-term license under the Company's MOSFET and IGBT patents. In August 1998, the Company filed suit against Fuji Electric Co., Ltd. ("Fuji") and Collmer Semiconductor, Inc. ("Collmer"), alleging infringement of certain of the Company's U.S. patents. The Company entered into a worldwide, royalty-bearing license agreement dated as of December 16, 1998 with Fuji under the Company's power MOSFET/IGBT patents thereby settling the litigation against both Fuji and Collmer. 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 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. Plaintiff's motion for reconsideration or certification of an interlocutory appeal of these rulings was denied. 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 financial condition and results of operations. Trial is scheduled for August 1999. No provision for any liability that may result upon adjudication of these matters has been made in the consolidated financial statements. 11 10. OTHER INCOME In December 1998, the Company entered into licensing agreements with two competitors, Samsung Semiconductor, Inc. and Samsung Electronics Co., Ltd. (together "Samsung") and Fuji Electric Co., Ltd. ("Fuji"), with respect to the Company's power MOSFET/IGBT patents. The respective agreements provide for payments of royalties for prior periods. The agreement with Samsung also provides for a paid-up license that will expire no later than May 1, 1999. The agreement with Fuji provides for ongoing royalties on worldwide sales covered by the Company's licensed patents. As a result of these agreements, the Company reported approximately $43.5 million as other income in the quarter ended December 31, 1998. The income reported was based upon the gross proceeds net of advanced and deferred royalty payments, patent defense costs and royalties due Unitrode Corporation, which previously held an exclusive license under the Company's MOSFET patents. As a result of patent litigation settlements, the Company will receive $48.4 million in cash over the next fourteen months. 12 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, 1998 COMPARED WITH THE THREE- AND SIX-MONTH PERIODS ENDED DECEMBER 31, 1997 The following table sets forth certain items as a percentage of revenues.
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, (UNAUDITED) (UNAUDITED) ---------------------- ---------------------- 1998 1997 1998 1997 ------- ------ ------- ------- Revenues 100.0% 100.0% 100.0% 100.0% Cost of sales 72.8 66.9 72.2 66.6 ------ ----- ------ ------ Gross profit 27.2 33.1 27.8 33.4 Selling and administrative expense 18.4 18.7 18.7 18.8 Research and development expense 7.8 6.1 7.8 6.3 Restructuring charge 9.0 -- 4.6 -- ------ ----- ------ ------ Operating profit (loss) (8.0) 8.3 (3.3) 8.3 Interest expense, net (2.2) (1.3) (2.1) (1.3) Other income (expense), net 33.0 (0.1) 17.0 (0.1) ------ ----- ------ ------ Income before income taxes 22.8 6.9 11.6 6.9 Provision for income taxes 7.9 2.3 4.0 2.3 ------ ----- ------ ------ Net income 14.9% 4.6% 7.6% 4.6% ------ ----- ------ ------ ------ ----- ------ ------
Revenues for the three-month period ended December 31, 1998 decreased 8.1% to $132.8 million from $144.6 million in the year-ago period. Revenues for the six-month periods ended December 31, 1998 and 1997 decreased 6.3% to $260.3 million from $277.7 million, respectively. These revenues were negatively impacted by average sales price reductions of approximately 12%, reflecting the Asian economic crisis, excess industry-wide manufacturing capacity, and sluggish global economic growth. Year to year, revenues were down approximately 19% in North America, reflecting reduced shipments to distributors, and down approximately 26% in Japan, reflecting a further decline in general economic conditions. Revenues in Asia Pacific were up approximately 25%, reflecting strength in the computer sector. Unit shipments increased by 24% year-to-year and in the quarter ended December 31, 1998 set a record high, reflecting strong growth in applications for the Company's products. Revenues in this six-month period included $11.1 million of net patent royalties, versus $8.9 million in the comparable prior-year period. Increased royalties primarily reflect the addition of licensees. December-quarter gross profit decreased to $36.2 million (27.2% of revenues) from $47.9 million (33.1% of revenues) in the comparable year-ago quarter. Gross profit for the six-month period ended December 31, 1998 decreased to $72.4 million (27.8% of revenues) from $92.8 million (33.4% of revenues) in the year-ago period. Gross profit decreased 13 because of reduced prices and lower absorption of overhead as a result of a planned production decrease, which reduced inventory levels by $12.1 million. The effect of reduced prices and lower overhead absorption was partially offset by reductions in manufacturing costs and increases in royalties. In addition, during December 1998, $2.5 million was charged to the cost of goods sold due to the write-down of inventory as a result of the planned relocation of assembly lines from the Company's facility in England to its facility in Mexico. Excluding the inventory charge, gross profit for the six-month period ended December 31, 1998 was 28.8% of revenue. See "Notes to Unaudited Consolidated Financial Statements - Note 5. Impairment of Assets and Restructuring Charges". In the three- and six-month periods ended December 31, 1998, selling and administrative expense was $24.4 million and $48.6 million (18.4% and 18.7% of revenues), respectively, versus $27.0 million and $52.3 million (18.7% and 18.8% of revenues) in the comparable year-ago periods. Reductions in selling and administrative expenses reflect management's continued efforts to control spending and to administer its activities more efficiently. In the three- and six-month periods ended December 31, 1998, the Company's research and development expenditures increased to $10.4 million and $20.4 million (7.8% and 7.8% of revenues), respectively, compared to $8.8 million and $17.5 million (6.1% and 6.3% of revenues) in the comparable prior-year periods. Higher research and development expenses reflect higher overhead costs associated with a new research and development facility and the Company's increased development of new products. A total restructuring charge of $14.5 million taken in the six months ended December 31, 1998 is a result of actions designed to cut costs by relocating high volume assembly lines from the Company's operation in England to its facility in Mexico and by streamlining worldwide sales and administration. This total charge consisted of an inventory write-down of $2.5 million and a $12.0 million restructuring charge consisting of $5.9 million in estimated severance costs and $6.1 million for the write-down of related assets. The Company expects the savings resulting from these activities to reduce product cost and selling and administrative expense as a percentage of sales. See "Notes to Unaudited Consolidated Financial Statements - Note 5. Impairment of Assets and Restructuring Charges". Other income was $44.3 million in the first half of fiscal 1999 versus other expense of $0.3 million in the comparable prior-year period, as a result of a $43.5 million pretax benefit related to the settlement of patent litigation during the second quarter of fiscal 1999. The income reported from these settlements in the quarter ended December 31, 1998 is net of advanced and deferred royalty payments, patent defense costs, and the share of the Company's royalty proceeds payable to Unitrode Corporation. In addition to amounts already received, the Company will receive $48.4 million in cash over the next fourteen months. Net interest expense increased $1.0 million and $1.8 million in the three- and six-month periods ended December 31, 1998, compared to the respective prior-year periods, reflecting increased interest expense incurred on higher average debt balances and a decrease in interest income. Net foreign currency gains and losses were less than $0.5 million in each six-month period. 14 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 During the six-month period ended December 31, 1998, cash and cash equivalents decreased by $9.4 million to $22.9 million. Operating activities provided $39.6 million in cash. The Company reduced accounts receivable by $14.0 million. The reduction was a result of focused collection efforts to reduce the Company's days of sales outstanding. The Company reduced inventories by $13.7 million, excluding restructuring charges of $2.5 million, as the result of planned lower production rates. As a result of patent litigation settlements, the Company will receive $48.4 million in cash over the next fourteen months. Investing activities consumed $28.9 million, primarily due to capital expenditures of $38.5 million. At December 31, 1998, the Company had made purchase commitments for capital equipment of approximately $5.6 million. During fiscal 1999, the Company plans on capital expenditures of approximately $70 million to expand fabrication and assembly capacity. The Company intends to fund capital expenditures and working capital requirements through cash, cash equivalents on hand, short-term investments, anticipated cash flow from operations, and as needed from funds available from revolving credit, term loan and equipment financing facilities. The Company is considering obtaining the use of funds from public or private offerings of debt. The Company may also consider using funds from other external sources including, but not limited to, public or private offerings of equity. Cash used in financing activities was $20.9 million, primarily the result of the paydown of short-term bank debt ($13.0 million) and a pension payout. The Company had established $61.5 million of domestic and foreign revolving lines of credit, against which $26.5 million had been borrowed. The Company had unused capital equipment credit lines of $48.0 million. However, due to covenant limitations, the total amount the Company had available for borrowing at December 31, 1998 was $58.0 million. In 1991, three class action lawsuits were brought against the Company and its Board of Directors. Although the Company believes that these suits are without merit (see "Notes to Unaudited Consolidated Financial Statements - Note 9. Litigation") the ultimate outcome thereof cannot presently be determined. Accordingly, the Company has not made 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"). 15 RECENT ACCOUNTING PRONOUNCEMENTS On June 30, 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("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. In April 1998, the Accounting Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-5 "Reporting on the Costs of Start-up Activities." SOP 98-5 requires certain start-up costs to be expensed as incurred. This SOP is effective for financial statements for fiscal years beginning after December 15, 1998. Management is currently evaluating the impact of SOP 98-5. Although the Company is not currently able to quantify an amount, adoption may have a material impact on its financial statements. IMPAIRMENT OF ASSETS AND RESTRUCTURING CHARGES Due to a continuous decline in selling prices for its MOSFET and IGBT products, 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 cost structure. Specifically, the restructuring activities included shifting production from older manufacturing facilities to newer, more efficient facilities, changing business processes by consolidating order entry, customer support, inventory management, information systems and finance activities at fewer locations and accelerating the deployment of the Company's new product development center. The restructuring activities were expected to reduce the cost of the Company's business processes and lower product costs and result in increased flow of new products, which are less price sensitive. The charge was composed of $61 million for the write-down of assets, $4 million for the write-down of inventory, primarily wafers, to net realizable value and $10 million for termination benefits to be paid in connection with the severed employees. The restructuring activities occurred over an approximate eighteen-month transition period through December 31, 1998. The asset write down of property and equipment of $61 million was determined by comparing the expected future undiscounted cash flows to the respective asset carrying value. If an asset was deemed to be impaired, the carrying value was adjusted to its expected future discounted cash flows. The net book value of the applicable property and equipment prior to the $61 million write-down was $79 million. The write-downs related to the following: 1) Wafer fabrication equipment located in El Segundo, California with a carrying value of $21 million, was adjusted to its fair value of $2 million. One wafer fabrication line, dedicated primarily to research and product development, was abandoned and replaced by a new product development facility in August 1998. The other wafer fabrication line, which manufactured product using equipment that processed 4-inch wafers, was abandoned and replaced with a more advanced line located in Italy, which processes 5-inch wafers, in August 1998. Using 5-inch wafers results in significant manufacturing savings. The current status of the wafer fabrication impaired equipment falls into three categories: a) it was scrapped as of June 1997. b) it is idle with no viable plans for usage or c) it is being used on a sporadic basis in research and development. There is no viable external market for this equipment. 2) Assembly equipment in England of $26 million was adjusted to its fair value of $4 million. Specifically, three product assembly and packaging lines in England were operating at a gross margin loss. The Company has continued to utilize these lines periodically for market development activities, and these lines remain unprofitable. 3) Information systems applications with a carrying value of $32 million were written down to $12 million as result of lack of vendor support. The Company's software vendor changed business strategies and informed the Company of its intention to stop supporting and developing the software technology that certain of the Company's information systems applications were based upon. It was determined in June 1997, that no viable alternative could be identified. As a result of this decision, the Company ceased development and implementation of certain forecasting, planning and order management programs and determined the assets related to these specific activities were impaired (i.e. no future use and were abandoned). These assets consisted of costs related to external consulting fees and expenses. The remaining book value relates to modules that have not been abandoned. As of December 31, 1998, the Company had eliminated approximately 221 employees related to the June 1997 restructuring. The majority of the positions eliminated were operators and technicians at the Company's North American operations. The Company also eliminated production and assembly positions in its manufacturing operations in Italy due to the outsourcing of certain production and assembly activities. In addition, administrative and sales positions in France, England, Germany, Japan and North America, related to the regional consolidation of certain administrative functions, were eliminated. As of December 31, 1998, the Company had incurred $65 million in non-cash asset writeoffs and paid $9 million for termination benefits. The remaining unutilized restructuring accrual of $1.0 million relates to severance payments to previously notified employees for positions that were scheduled to be eliminated during the remainder of fiscal year 1999. The majority of these remaining positions were eliminated in the last week of January and the first week of February 1999. The Company anticipated this restructuring to result in annual savings of approximately $20 million, which would be fully achieved on an annual basis beginning in December 1998. The company reduced annual depreciation and annual selling and administrative cost by approximately $10 million each. The Company believes that it has achieved these savings, but they have been offset by continued selling price reductions, which impacted gross margin, and by higher unit sales, which increased total selling and administrative expense. During December, 1998, 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, and to centralize more of its European customer service and administrative activities resulting in reductions in personnel. The Company expects to complete this operational transition over the next eighteen months. The charge consisted of $5.9 million for estimated severance costs associated with the elimination of approximately 350 positions, primarily consisting of operators and technicians, $6.1 million for the write-off of assets to be abandoned, and $2.5 million for the write-down of inventory related to specialty product lines. The Company estimates that, ultimately, charges associated with these actions will total approximately $19.5 million, and the Company expects to recognize the final charge of approximately $5.0 million, relating to additional severance costs, in the third quarter of fiscal 1999, after proper notification to these additional affected employees. None of the assets written down, consisting primarily of building improvements relating to the high volume assembly production lines, and production information systems, will remain in use and will be abandoned after the production lines are relocated. In total, these cost saving activities, upon completion, are expected to result in estimated annual savings of approximately $13 million, of which $750,000 relates to amortization and depreciation savings. The estimated savings consist of lower direct labor costs, lower factory overhead (including lower depreciation expense), lower materials costs and lower selling and administrative costs. 16 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 will need to be upgraded or replaced to distinguish 21st century dates from 20th century dates. The Company has adopted the definition of Year 2000 conformity published by the British Standards Institute ("BSI") as DISC PD2000-1. Currently, none of the Company's products contain date processing logic. The Company therefore believes that its products are Year 2000 compliant pursuant to the BSI DISC PD2000-1 definition. The Company has established a Global Year 2000 Team as well as local site teams. The Global Year 2000 Team was formed to manage and coordinate company-wide Year 2000 initiatives, while local site teams address research and remediation for site-specific equipment, facilities and suppliers. 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 December 31, 1998 the Company has spent $3.0 million of this budget. The Company prioritized efforts to prepare its information 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 information systems in phases, first 17 establishing an inventory and then assessing, correcting, testing, and certifying compliance. Correction of critical information systems is scheduled to be completed by May 31, 1999. At this time each of these critical systems is performing in its remediated form in at least one site in the world. In addition, the Company has inventoried all potentially affected facilities, equipment and other infrastructure and has identified solutions for each one of critical importance that is not presently compliant. The Company expects to complete its remediation efforts for critical items by May 31, 1999. Non-critical items are scheduled to be corrected on or before November 30, 1999. Furthermore, the Company has established programs to ensure that current and future purchases of equipment and software are Year 2000 compliant pursuant to the BSI DISC PD2000-1 definition. The Company is currently surveying its suppliers and business partners, including financial institutions with whom it has material relationships, to determine whether they are Year 2000 compliant. The Company has also begun site visits to its key suppliers. 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 may have on the Company. The Company is developing contingency plans in the event the Company or its material customers, suppliers or vendors are not Year 2000 compliant by January 1, 2000. There can be no assurance that the Company's compliance efforts and contingency plans 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 fabrication, 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 as well as industry and commerce generally. The costs of the Company's Year 2000 remediation and the dates on which the Company believes that it will be completed are based on the Company's best estimates, which were based on assumptions of future events, including the continued availability of certain resources, third-party compliance and other factors. There can be no assurance that these estimates will be achieved, and actual results could differ materially from those anticipated. Based on currently available information, management does not believe that the Year 2000 matters discussed above will have a material adverse impact on the Company's financial condition, liquidity, or results of operations. The Company is not aware of any material vendor or suppliers who appear unable to be ready for Year 2000. Currently utilities are the area of greatest concern. However, to date interviews and research of the Company's power and water suppliers do not indicate that these areas will result in any reasonably likely worst case scenarios. The disclosures contained herein are Year 2000 statements and constitute a Year 2000 Readiness Disclosure under Public Law No. 105-271. 18 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 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. 19 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 17, 1999 MICHAEL P. MCGEE ------------------------------------- Michael P. McGee Executive Vice President, Chief Financial Officer and Principal Accounting Officer 20 PART II. OTHER INFORMATION ITEM 3. LEGAL PROCEEDINGS See Notes 7, 8, 9 and 10 to the accompanying consolidated financial statements. 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 23, 1998, with the following results:
Authority Description of matter For Withheld --- --------- 1. Election of Directors George Krsek 46,369,637 573,770 Jack O. Vance 46,388,172 555,235 Derek B. Lidow 46,435,525 507,882 For Against Abstentions --- ------- ----------- 2. Ratification of PricewaterhouseCoopers LLP as Independent Auditors for fiscal 1999 46,635,298 199,516 108,593
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