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| IRF > SEC Filings for IRF > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with our audited historical consolidated financial statements which are included in our Form 10-K, filed with the SEC on August 27, 2009. Except for historic information contained herein, the matters addressed in this MD&A constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and Section 21E of the Exchange Act, as amended. Forward-looking statements may be identified by the use of terms such as "anticipate," "believe," "expect," "intend," "project," "will," and similar expressions. Such forward-looking statements are subject to a variety of risks and uncertainties, including those discussed under the heading "Statement of Caution Under the Private Securities Litigation Reform Act of 1995," in Part II, Item 1A, "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q, that could cause actual results to differ materially from those anticipated by us. We undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this Quarterly Report or to reflect actual outcomes.
Overview
We design, manufacture and market power management semiconductors. Power management semiconductors address the core challenges of power management, power performance and power conservation, by increasing system efficiency, allowing more compact end-products, improving features on electronic devices and prolonging battery life.
We pioneered the fundamental technology for power metal oxide semiconductor field effect transistors ("MOSFETs") in the 1970s, and estimate that the majority of the world's planar power MOSFETs use our technology. Power MOSFETs are instrumental in improving the ability to manage power efficiently. Our products include power MOSFETs, high voltage analog and mixed signal integrated circuits ("HVICs"), low voltage analog and mixed signal integrated circuits ("LVICs"), digital integrated circuits ("ICs"), radiation-resistant ("RAD-Hard™") power MOSFETs, insulated gate bipolar transistors ("IGBTs"), high reliability DC-DC converters, PowerStage ("PS") modules, and DC-DC converter type applications.
Although our revenues declined for the three months ended September 27, 2009, compared to the prior year comparable period by 22.7 percent for our ongoing segments, we experienced stronger demand during the first three months of fiscal year 2010 with the overall market, resulting in a 12.4 percent sequential increase in revenue in the quarter compared to the prior quarter. This sequential revenue growth during the quarter allowed us to reduce our weeks of inventory by one week from the prior quarter to 15 weeks of inventory as of September 27, 2009. We currently expect a further revenue increase for the three months ending December 27, 2009. With the increased demand, our lead times for many of our products have increased, and we have had challenges in meeting all of the demand. To respond to the increased demand, we are continuing with a strategy to increase capacity through qualification of external manufacturing sources.
We are proceeding with our plans to consolidate our manufacturing sites in order to reduce our costs. The plans we initiated during fiscal year 2009 to reduce the size of our Newport, Wales wafer fabrication facility and to close our El Segundo, California wafer fabrication facility are proceeding. However, as we noted in our Annual Report on Form 10-K filed in August 2009, we postponed a portion of the initiative at our Newport, Wales wafer fabrication facility in the fourth quarter of fiscal year 2009, due to a significant increase in demand, until at least July 2010 or when sufficient alternative external capacity comes on-line. Since we already implemented fixed cost reductions associated with this initiative, we are saving $3.6 million on an annualized basis associated with this initiative beginning in the June 2009 quarter. The estimated completion of the closure of our El Segundo, California wafer fabrication facility is the end of the second quarter of fiscal year 2011. We estimate that this factory closure will save us approximately $12.7 million per year beginning in third quarter of fiscal year 2011.
In addition to reducing our manufacturing costs, we have continued our efforts to align our operating expense structure with our revenue levels. During the three months ended September 27, 2009, excluding a $45.0 million class action lawsuit settlement and a $9.5 million insurance reimbursement that were recorded in the prior quarter, we reduced our selling, general and administrative expenses from the prior quarter by $3.9 million. On a year over year basis, excluding $16.4 million of investigation, filing support and proxy contest and filing costs, selling, general and administrative expense decreased approximately $4.9 million. These selling, general and administrative savings were achieved through lower salary related costs due to headcount reductions which were partially offset by higher severance expenses. Although we plan to reduce our manufacturing and selling and administrative costs in the near term, we expect to maintain our investment levels in new product development in order to meet our longer term revenue goals. However, during the three months ended September 27, 2009, research and development spending declined by $3.4 million from the prior quarter. This reduction in research and development expense was driven by lower engineering builds rather than lower research and development headcount, which remained flat with the prior quarter.
Our cash flows from operations was a use of cash of approximately $7.1 million for the first three months of fiscal year 2010 an improvement from the prior year comparable period which was a use of cash of $16.1 million. Our cash, cash equivalents and investments, excluding restricted cash, as of September 27, 2009 totaled $586.9 million compared to $600.5 million as of June 28, 2009. The quarterly decline in cash and investments was driven primarily by cash used in operations and capital expenditures of approximately $9.5 million during the first three months of fiscal year 2010.
Segments
During fiscal 2009 we reported the ongoing work for Vishay Intertechnology, Inc. ("Vishay") under the transition product services agreement ("TPSA") as part of Transition Services segment, separate from our ongoing segments. The immaterial amount of remaining sales to Vishay has been included in our ongoing segments in the Power Management Devices segment beginning in the first three months of fiscal year 2010. For a description of our reportable segments, see Note 12, "Segment Information."
Results of Operations
Selected Operating Results
The following table sets forth certain operating results for the three months
ended September 27, 2009 and September 28, 2008 as a percentage of revenues (in
millions, except percentages):
Three Months Ended
September 27, 2009 September 28, 2008
Revenues $ 179.4 100.0 % $ 244.5 100.0 %
Cost of sales 132.0 73.6 148.1 60.6
Gross profit 47.4 26.4 96.4 39.4
Selling and administrative expense 43.6 24.3 64.9 26.5
Research and development expense 22.8 12.7 24.7 10.1
Amortization of acquisition-related
intangible assets 1.1 0.6 1.1 0.4
Asset impairment, restructuring and
other charges 0.2 0.1 0.5 0.2
Operating (loss) income (20.3 ) (11.3 ) 5.2 2.1
Other expense, net 0.8 0.4 14.6 6.0
Interest income, net (4.0 ) (2.2 ) (5.1 ) (2.1 )
Loss before income taxes (17.1 ) (9.5 ) (4.3 ) (1.7 )
Benefit from income taxes (0.2 ) (0.1 ) (0.1 ) -
Net loss $ (16.9 ) (9.4 )% $ (4.2 ) (1.7 )%
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Results of Operations for the Three Months Ended September 27, 2009 compared with the Three Months Ended September 28, 2008
The following table sets forth certain items included in selected financial data as a percentage of revenues (in millions, except percentages):
Revenue and Gross Margin (Dollars in thousands) Three Months Ended Ongoing Segments September 27, 2009 September 28, 2008 Change Revenues $ 179,371 $ 232,105 (22.7 %) Gross Margin $ 47,357 $ 96,978 (51.2 %) Gross Margin % 26.4 % 41.8 % (15.4) ppt |
Revenue for our ongoing segments, which includes all of our operating segments, declined $52.7 million, or 22.7 percent, for the three months ended September 27, 2009 compared to the three months ended September 28, 2008. This does not include revenue from the Transition Services segment, due to the completion of the Divestiture transition during the fourth quarter of fiscal year 2009. Beginning with the three months ended September 27, 2009, the immaterial amount of remaining Transition Services revenues are now included within the PMD segment.
Revenue from our product sales segments declined by $34.5 million, or 16.3
percent for the three months ended September 27, 2009 compared to the three
months ended September 28, 2008, due primarily to 1) a slowdown in the economy,
2) customer draw down of inventories, 3) lower sales of our game station related
products and 4) the impact of lower average selling prices. Our IP segment
reported lower revenue by $18.2 million due to the non-recurrence of an $18.7
million in royalties attributed to a one-time amendment to one of our patent
licenses in the prior year.
During the three months ended September 27, 2009, our gross margin declined 15.4
percentage points for our ongoing segments compared to the three months ended
September 28, 2008. This decline was due to the unfavorable impact on gross
margin from; 1) a decline in IP segment revenue, recognized at 100 percent gross
margin, 2) lower average selling prices, 3) a shift in sales mix toward
lower-margin products, and 4) the spreading of our fixed manufacturing costs
over a lower volume of products manufactured. The majority of the decline in
product segment margin was due to lower average selling prices and the shift in
mix. We shifted production toward lower-margin products to utilize our
production capacity. This resulted in a smaller decline in revenues in our PMD
business segment compared to the other segments. Additionally, even within the
PMD segment, there was a shift toward lower-margin products.
We expect our margin percentages to improve incrementally for the three months ended December 27, 2009, with better factory utilization from increased volumes as a result of expected increases in revenue.
Revenue and gross margin by business segments are as follows (in thousands, except percentages):
(Dollars in thousands) Three Months Ended
September 27, September
Power Management Devices (PMD) 2009 28, 2008 Change
Revenues $ 66,524 $ 73,778 (9.8 %)
Gross Margin $ 3,528 $ 15,800 (77.7 %)
Gross Margin % 5.3 % 21.4 % (16.1) ppt
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The 9.8 percent revenue decrease for the three months ended September 27, 2009 compared to the three months ended September 28, 2008 for PMD was due to a slowdown in the market, a decline in demand for industrial products as well as notebooks and other consumer related products. The year-over-year decrease of 16.1 percentage points in gross margin was primarily due to lower average selling prices, which accounted for approximately two thirds of the margin decline, unfavorable product mix due to a higher percentage of consumer business, and higher unit costs as we shipped parts during the quarter that were produced in prior periods when our manufacturing costs were higher due to lower volumes.
(Dollars in thousands) Three Months Ended
September 27, September
Energy Saving Products (ESP) 2009 28, 2008 Change
Revenues $ 37, 863 $ 46,136 (17.9 %)
Gross Margin $ 13,096 $ 19,177 (33.8 %)
Gross Margin % 34.6 % 42.9 % (8.3) ppt
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The 17.9 percent revenue decrease for the three months ended September 27, 2009 compared to the three months ended September 28, 2008 for ESP was due to a slowdown in the market as a result of the economic recession and a decline in sales of our industrial and consumer appliance related products. The 8.3 percentage point decline in gross margin for the three months ended September 27, 2009 compared to the prior year comparable period was primarily due to lower volumes which increased our fixed costs as a percent of revenue and to lower average selling prices. These unfavorable impacts on gross margin were partially offset by a favorable product mix.
(Dollars in thousands) Three Months Ended HiRel September 27, 2009 September 28, 2008 Change Revenues $ 32,609 $ 37,352 (12.7 %) Gross Margin $ 15,706 $ 19,667 (20.1 %) Gross Margin % 48.2 % 52.7 % (4.5) ppt |
The 12.7 percent revenue decrease for the three months ended September 27, 2009 compared to the three months ended September 28, 2008 for HiRel was mainly due to a reduction in volume as a result of a weaker commercial aviation market and delayed shipments due to the introduction of improved proprietary testing technologies and equipment. These new proprietary testing technologies and equipment have subsequently been released to production and no further delays are expected. The 4.5 percentage point decline in gross margin for the three months ended September 27, 2009 compared to the three months ended September 28, 2008 was driven by a decrease in volume which increased our fixed costs as a percentage of revenues and an increase in inventory write-down costs which reduced the gross margin by 2.4 percentage points associated with inventory that was deemed to be in excess of demand. These unfavorable impacts on gross margin were partially offset by an improvement in average selling prices and a favorable product mix.
(Dollars in thousands) Three Months Ended Automotive Products (AP) September 27, 2009 September 28, 2008 Change Revenues $ 13,192 $ 17,593 (25.0 %) Gross Margin $ 2,414 $ 5,873 (58.9 %) Gross Margin % 18.3 % 33.4 % (15.1) ppt |
The 25.0 percent revenue decrease for the three months ended September 27, 2009 compared to the three months ended September 28, 2008 for AP was due to the production cuts by the automotive industry in the U.S. and Europe as a result of softness in the U.S. and European markets. The 15.1 percentage point decrease in gross margin was due to the impact of lower average selling prices which accounted for about 60 percent of the decline and lower volumes. These unfavorable impacts on gross margin were partially offset by a favorable product mix.
(Dollars in thousands) Three Months Ended Enterprise Power (EP) September 27, 2009 September 28, 2008 Change Revenues $ 27,445 $ 37,279 (26.4 %) Gross Margin $ 10,877 $ 15,894 (31.6 %) Gross Margin % 39.6 % 42.6 % (3.0) ppt |
The 26.4 percent revenue decrease for the three months ended September 27, 2009 for EP was primarily due to a significant last time buy in the year ago comparable quarter with one of our gaming console customers. Our server and storage business remained approximately flat in spite of a significant decrease in end unit sales as the industry transitioned from an older server platform to a newer, more energy efficient platform, where EP enjoys significantly higher content per box. The 3.0 percentage point decline in the gross margin was due to the unfavorable impact of lower average selling prices partially offset by a favorable product mix.
(Dollars in thousands) Three Months Ended Intellectual Property (IP) September 27, 2009 September 28, 2008 Change Revenues $ 1,738 $ 19,967 (91.3 %) Gross Margin $ 1,738 $ 19,967 (91.3 %) Gross Margin % 100.0 % 100.0 % --- % |
The 91.3 percent decline in IP revenue for the three months ended September 27, 2009 compared to the three months ended September 28, 2008 was due to the non-recurrence of an $18.7 million in royalties attributed to a one-time amendment to one of our patent licenses in the prior year.
Selling, General and Administrative Expense (Dollars in thousands) Three Months Ended Selling, General and September September Administrative 27, 2009 % of Revenue 28, 2008 % of Revenue Change Revenues $ 179,371 $ 244,474 (26.6 %) Selling, general and administrative expenses $ 43,582 24.3 % $ 64,877 26.5 % (2.2) ppt Proxy contest and filing costs $ - - % $ 1,980 0.8 % (0.8) ppt Investigation and Filing Support $ - - % $ 14,460 5.9 % (5.9) ppt |
Selling, general and administrative expense was $43.6 million (24.3 percent of revenue) and $64.9 million (26.6 percent of revenue) for the three months ended September 27, 2009 and September 28, 2008, respectively. The year-over-year decrease in selling, general and administrative expense was due primarily to the $14.5 million of investigation and filing support costs and $1.9 million of proxy contest and filing costs incurred in the prior year comparable period. The investigation and filing support costs related to the prior Audit Committee-led investigation including legal, audit and consulting fees and costs associated with the Investigation, reconstruction of the financial results at our Japan subsidiary, and restatement of multiple periods of consolidated financial statements. The proxy filing cost relate to costs incurred in the year ended June 28, 2009, in connection with our delayed 2007 annual meeting and the unsolicited proposal, tender offer, and certain other actions initiated by Vishay, as further discussed in our annual report on Form 10-K for the period ending June 28, 2009 filed August 27, 2009.
Excluding the above mentioned costs, selling, general and administrative expense decreased by $4.9 million to $43.6 million in the current fiscal quarter as compared to the prior fiscal period ended September 28, 2008. These cost decreases were primarily due to lower salary related expenses as a result of the company initiatives to reduce headcount and lower freight cost due to the decline in sales; partially offset by $0.7 million of higher severance related expenses for the three months ended September 27, 2009 compared with the three months ended September 28, 2008. We expect to slightly lower our selling, general, and administrative expenses further during the three months ending December 27, 2009.
Research and Development Expense (Dollars in thousands) Three Months Ended Research and September September Development 27, 2009 % of Revenue 28, 2008 % of Revenue Change Revenues $ 179,371 $ 244,474 (26.6 %) Research and Development costs $ 22,827 12.7 % $ 24,717 10.1 % 2.6 ppt |
Research and development ("R&D") expense was $22.8 million (12.7 percent of revenue) and $24.7 million (10.1 percent of revenue) for the three months ended September 27, 2009 and September 28, 2008, respectively. The year-over-year decrease of $1.9 million in R&D expenses was mainly due to our initiatives to size the organization to be in line with our lower revenue level as well as savings related to the planned closure of two R&D facilities in El Segundo, California and Oxted, England. Total costs incurred for the facility closures were $0.1 million and $0.9 million for the three months ended September 27, 2009 and September 28, 2008, respectively. Despite these actions, we continue to devote significant resources to our R&D activities. We concentrate our R&D activities on developing new platform technologies, such as our recently announced Gallium Nitride ("GaN") technology, as well as our power management ICs and the advancement and diversification of our HEXFET®, power MOSFET™ and insulated gate bipolar transistor ("IGBT") product lines.
Asset Impairment, Restructuring and Other Charges
Asset impairment, restructuring and other charges reflect the impact of cost reduction programs initiated during fiscal years 2009 and 2008 as well as work force reduction actions undertaken as a result of the termination of the wafer services portion of the TPSA. These programs and initiatives include the closing of facilities, the relocation of equipment and employees, the termination of employees and other related activities.
The following table summarizes restructuring charges incurred related to the restructuring initiatives discussed below. These charges were recorded in asset impairment, restructuring and other charges (in thousands):
Three Months Ended
September 27, September 28,
2009 2008
Reported in asset impairment, restructuring and other charges
Severance and workforce reduction costs $ 91 $ 351
Other Charges 76 120
Total asset impairment, restructuring and other charges $ 167 $ 471
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In addition to the amounts in the table above, $0.4 million of workforce reduction expense related to retention bonuses were recorded in cost of sales during the first three months of fiscal year 2010 related to the restructuring initiatives. We also incurred approximately $1.4 million of costs to relocate and install equipment. These costs are not considered restructuring costs and were recorded in costs of sales.
The following table summarizes changes in our restructuring related accruals for three months ended September 27, 2009 which are included in other accrued expenses on the balance sheet (in thousands):
Research &
Development
and PCS
Newport, Wales El Segundo Divestiture
Accrued severance and workforce reduction costs,
June 28, 2009 $ 359 $ 3,535 $ 376
Accrued during the quarter and charged to asset
impairment, restructuring and other charges - 202 -
Accrued during the quarter and charged to
operating expenses - 341 16
Costs paid during the quarter - (2 ) (92 )
Foreign exchange gains (12 ) - (4 )
Change in provision - - (111 )
Accrued severance and workforce reduction costs,
September 27, 2009 $ 347 $ 4,076 $ 185
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The following table summarizes the total asset impairment, restructuring and other charges by initiative for the three months ended September 27, 2009 and September 28, 2008:
Research &
Development PCS Divestiture
El Segundo Facility (Recoveries) Total
For the three months ended September 28,
2008 reported in asset impairment,
restructuring and other charges
Severance and workforce reduction
costs $ - $ 351 $ - $ 351
Other charges - 120 - 120
For the three months ended September 28,
2008, total asset impairment,
restructuring and other charges $ - $ 471 $ - $ 471
. . .
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