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IRF > SEC Filings for IRF > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for INTERNATIONAL RECTIFIER CORP /DE/

Form 10-Q for INTERNATIONAL RECTIFIER CORP /DE/


2-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 23, 2012 ("2012 Annual Report"). 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.
Introduction
The following discussion and analysis provides information we believe is relevant to an assessment and understanding of our consolidated results of operations and financial condition. This discussion should be read in conjunction with our condensed consolidated financial statements and accompanying notes for the three months ended September 23, 2012. The discussion includes:

Overview

Results of Operations

Liquidity and Capital Resources

Critical Accounting Policies

Overview

Our revenues were $252.5 million and $302.7 million for the three months ended September 23, 2012 and September 25, 2011, respectively, a decrease of 16.6 percent in the current quarter. We experienced a sharp decline in demand for our products during fiscal year 2012, and we have not seen a recovery in demand during the three months ended September 23, 2012, with a sequential decrease in revenue of 6.4 percent compared to the three months ended June 24, 2012. We currently expect revenues for the next fiscal quarter to range between $215 million and $230 million.

Our gross margin percentage declined by 10.0 percentage points to 27.9 percent for the three months ended September 23, 2012, compared to the three months ended September 25, 2011, and increased by 2.0 percentage points compared to the three months ended June 24, 2012. The decrease in gross margin percentage compared to the three months ended September 25, 2011 was a result of a decrease in factory utilization and an unfavorable product mix due to a decline in industrial component sales which generally have higher gross margins than our consumer and computing component product sales. The increase in the gross margin percentage compared to the three months ended June 24, 2012 was due to certain impairment costs that affected that quarter, an improved product mix due to an increase in HiRel sales as a percentage of our total sales, and decreased inventory write-downs, partially offset by a decrease in factory utilization. As a result of decreased customer demand, we expect our gross margin for the next fiscal quarter to be between 22 percent and 23 percent.

During the three months ended September 23, 2012, we took a number of actions to respond to a decrease in customer demand, including initiatives to adjust our internal manufacturing footprint and reduce costs. We also continued our existing efforts to increase our manufacturing flexibility by qualifying new technologies and higher value-added products and programs with our contract wafer fabrication and assembly and test suppliers. We will continue to monitor the demand environment and we may seek to further adjust our operational footprint and take other actions to reflect changes in demand.


Table of Contents
During the three months ended September 23, 2012, we adopted a restructuring plan to modify our manufacturing strategy and lower our operating expenses in order to align our cost structure with current business conditions. As part of the plan, we intend to close our El Segundo wafer fabrication facility, resize our Newport, Wales wafer fabrication facility and take other cost reduction actions. We plan to complete the closure of our El Segundo wafer fabrication facility by the end of March 2013 with estimated annual cost savings of approximately $10 million following completion. The resizing of our Newport, Wales fabrication facility is expected to continue in several phases through the middle of calendar year 2015 with estimated annual cost savings of approximately $16 million following completion. During the three months ended September 23, 2012, we also reduced our cost of goods sold, selling, general and administrative costs and research and development costs through headcount reductions, and there are additional reductions planned for the second quarter.
When complete, this headcount reduction initiative is expected to generate $13 million of annual cost savings. In conjunction with the above plans, we incurred approximately $9.0 million of severance and related costs during the three months ended September 23, 2012. Additionally, we anticipate that we will incur asset impairment, restructuring and other charges during the remainder of fiscal year 2013 of approximately $6.3 million (See Part I, Item 1, Notes to Consolidated Financial Statements- Note 11, "Asset Impairment, Restructuring and Other Charges").

During the three months ended September 23, 2012, our selling, general and administrative ("SG&A") expenses decreased $4.0 million compared to the three months ended June 24, 2012 and decreased $1.7 million compared to the three months ended September 25, 2011. As a percentage of revenues, SG&A expense was 18.7 percent of revenue, down 0.3 percentage points compared to the three months ended June 24, 2012 and up 2.5 percentage points compared to the three months ended September 25, 2011. The year-over-year decrease in SG&A expenses was primarily due to a decrease in headcount related expenses, including incentive bonus, offset by depreciation related to our Enterprise Resource Planning ("ERP") system, higher legal costs, and increased stock compensation expense. The sequential decrease in SG&A expenses was primarily due to decreases in severance, professional services, and salaries, offset by higher stock compensation expense, commissions, and legal costs. We expect our SG&A expenses to be reduced to approximately $45 million in the second quarter of fiscal year 2013 as a result of operational efficiencies we have achieved from the ERP implementation.

During the three months ended September 23, 2012, research and development ("R&D") spending decreased by $1.6 million compared to the three months ended June 24, 2012 and increased by $0.4 million compared to the three months ended September 25, 2011. As a percentage of revenues, R&D expense increased from 13.0 percent for the three months ended June 24, 2012 and 10.9 percent for the three months ended September 25, 2011 to 13.2 percent for the three months ended September 23, 2012. The year-over-year increase in R&D expenses was primarily a result of increased material costs and higher salary and stock compensation expense, offset by a decrease in incentive bonus. The sequential decrease in R&D expenses was primarily driven by decreased headcount, lower material costs, and less travel expense. We expect to reduce spending levels for new product development over the next year as part of our cost reduction initiatives.

Our cash flows from operating activities provided $6.5 million of cash during the first three months of fiscal year 2013 compared to $16.6 million for prior year comparable period. Our cash, cash equivalents and investments as of September 23, 2012 totaled $365.6 million (excluding restricted cash of $1.6 million), compared to $384.3 million (excluding restricted cash of $1.5 million) as of June 24, 2012. The decrease in our cash and investments was primarily due to our operating loss during the first quarter of fiscal year 2013.

Segment Reporting
For the description of our reportable segments, see Note 12, "Segment Information", to our Consolidated Financial Statements set forth in Part I, Item 1.
Four of our five ongoing customer segments, namely, PMD, ESP, AP and EP, generally share the same manufacturing base and sales, marketing, and distribution channels. While each segment focuses on different target markets and applications, there are common performance elements arising from that shared manufacturing base and sales, marketing, and distribution channels. As a result, while we manage performance of these segments individually, we also analyze performance of these segments together, separately from our other ongoing customer segment, HiRel. For ease of reference, we refer to these four segments collectively as our "Commercial Segments." What we refer to as our "ongoing customer segments" include our PMD, ESP, AP, EP and HiRel reporting segments, and what we refer to as our "ongoing segments" include the ongoing customer segments as well as the IP reporting segment.


Table of Contents
Results of Operations

Selected Operating Results

The following table sets forth certain operating results for the three months
ended September 23, 2012 and September 25, 2011 as a percentage of revenues (in
millions, except percentages):
                                                              Three Months Ended
                                              September 23, 2012             September 25, 2011
Revenues                                   $    252.5          100.0 %    $    302.7          100.0 %
Cost of sales                                   182.0           72.1           187.9           62.1
Gross profit                                     70.5           27.9           114.8           37.9
Selling, general and administrative
expense                                          47.3           18.7            49.0           16.2
Research and development expense                 33.4           13.2            33.0           10.9
Amortization of acquisition?related
intangible assets                                 1.7            0.7             2.6            0.9
Asset impairment, restructuring and
other charges                                     9.0            3.6               -              -
Operating income                                (20.8 )         (8.3 )          30.2           10.0
Other expense, net                                1.0            0.4             2.2            0.7
Interest income, net                                -              -            (0.2 )         (0.1 )
Income before income taxes                      (21.8 )         (8.6 )          28.2            9.3
Provision for (benefit from) income
taxes                                             7.0            2.8             6.2            2.0
Net income (loss)                          $    (28.8 )        (11.4 )%   $     22.0            7.3 %

Amounts and percentages in the above table may not total due to rounding.

Revenues and Gross Margin - Three Months Ended

The following table summarizes revenues and gross margin by reportable segment for the three months ended September 23, 2012 compared to the three months ended September 25, 2011. The amounts in the following table are in thousands:

                                                         Three Months Ended
                                 September 23, 2012                              September 25, 2011                             Change
                                                        Gross                                           Gross
                     Revenues       Gross Margin       Margin %      Revenues       Gross Margin       Margin %       Revenues       Gross Margin
Power Management
Devices (PMD)        $  90,826     $       18,545           20.4 %   $ 111,207     $       32,690           29.4 %        (18.3 )%       (9.0) ppt
Energy Saving
Products (ESP)          44,455              6,255           14.1        76,058             31,517           41.4          (41.6 )            (27.3 )
Automotive
Products (AP)           28,838              3,000           10.4        28,900              9,092           31.5           (0.2 )            (21.1 )
Enterprise Power
(EP)                    37,809             14,362           38.0        35,966             14,484           40.3            5.1               (2.3 )
  Commercial
segments total         201,928             42,162           20.9       252,131             87,783           34.8          (19.9 )            (13.9 )
HiRel                   48,416             26,891           55.5        48,842             25,287           51.8           (0.9 )              3.7
  Customer
segments total         250,344             69,053           27.6       300,973            113,070           37.6          (16.8 )            (10.0 )
Intellectual
Property (IP)            2,148              1,488           69.3         1,768              1,768          100.0           21.5              (30.7 )
  Consolidated
total                $ 252,492     $       70,541           27.9 %   $ 302,741     $      114,838           37.9 %        (16.6 )%       (10.0)ppt

Revenues

Revenues from all our segments, taken as a whole, decreased by $50.2 million, or 16.6 percent, while revenues from our customer segments (which excludes the IP segment) decreased by $50.6 million, or 16.8 percent, for the three months ended September 23, 2012 as compared to three months ended September 25, 2011.
Revenues for our commercial segments taken as a whole decreased 19.9 percent from prior year comparable period which was near the peak of semiconductor cycle. Revenues for our HiRel segment decreased 0.9 percent from the prior year comparable period.


Table of Contents
Within our commercial segments, EP revenue increased 5.1 percent for the three months ended September 23, 2012 as compared to the prior year comparable period.
Revenues for our EP segment increased due to an increase in demand for high performance computing and prior generation server components. Revenues for our PMD segment decreased 18.3 percent compared to the prior year comparable period due to a decrease in demand for our universal power supply, consumer products, and industrial products components. Revenues for our ESP segment decreased 41.6 percent due to decreased demand in our industrial and consumer appliance related products. Revenues for our AP segment remained fairly flat with a slight decrease of 0.2 percent compared to the prior year comparable period.

For the three months ended September 23, 2012, our HiRel segment revenues decreased 0.9 percent compared to the prior year comparable period. HiRel experienced slight changes in product line mix with most market areas maintaining demand similar to that of the prior year comparable period.

For the three months ended September 23, 2012, our IP segment revenues increased $0.4 million or 21.5 percent, to $2.1 million. The increase in revenue arose from a one-time $1.7 million sale of patents. We expect our IP segment revenues will return to approximately $0.4 million per quarter in each of the next several quarters. However, we do intend to continue to seek opportunistic sale and/or licensing opportunities consistent with our business strategy.

Gross Margin

Our gross margin decreased by 10.0 percentage points to 27.9 percent for the three months ended September 23, 2012 compared to the prior year comparable period. This decrease in our gross margin was the result of a decrease of 13.9 percentage points in gross margin for our commercial segments taken as a whole, and an increase of 3.7 percentage points in gross margin for our HiRel segment.
The decrease in gross margin for all of our commercial segments was primarily due to increased costs associated with lower factory utilization, unfavorable change in product mix and increased inventory reserves. Our EP segment's unfavorable product mix was due to an increase in computing components business, which has lower gross margins than our server business. Our AP segment's unfavorable product mix was due to a decrease in our IC product demand, which are higher margin products than our MOSFET products. Our PMD segment's unfavorable change in product mix was due to reduced sales of our industrial products, which have higher gross margins than our consumer components business, as well as price erosion. Our ESP segment's unfavorable product mix was due to a decrease in HVIC demand, which generally are higher margin products than our IGBT products.

HiRel segment's gross margin improved by 3.7 percentage points for the three months ended September 23, 2012 compared to the prior year comparable period due to recognition of high margin revenues related to the space market, a decline in some low margin shipments, and delivery of certain products that carried a lower cost of production versus the comparable prior period.

IP segment's gross margin declined by 30.7 percentage points for the three months ended September 23, 2012 compared to the prior year comparable period due to costs associated with the sale of patents.

Selling, General and Administrative Expense

(Dollars in
thousands)                                      Three Months Ended
                        September                            September
                         23, 2012        % of Revenues        25, 2011        % of Revenues           Change
Selling, general and   $     47,295                18.7 %   $     48,991                16.2 %        2.5ppt
administrative
expenses

Selling, general and administrative expense was $47.3 million (18.7 percent of revenues) and $49.0 million (16.2 percent of revenues) for the three months ended September 23, 2012 and September 25, 2011, respectively. The decrease in selling, general and administrative expense for the three months ended September 23, 2012, compared to the prior year comparable period, was primarily due to a decrease in salaries and incentive bonuses, offset by increased depreciation related to our ERP system, higher legal costs, and increased stock compensation expense. We expect our SG&A expenses to be reduced to approximately $45 million for the second quarter of fiscal year 2013 as a result of operational efficiencies we have achieved from the ERP implementation combined with the implementation of our cost reduction initiatives.


Table of Contents
Research and Development Expense

(Dollars in                                     Three Months Ended
thousands)
                        September                            September
                         23, 2012        % of Revenues        25, 2011        % of Revenues           Change
Research and
Development expense    $     33,449                13.2 %   $     33,028                10.9 %        2.3ppt

Research and development expense was $33.4 million (13.2 percent of revenues) and $33.0 million (10.9 percent of revenues) for the three months ended September 23, 2012 and September 25, 2011, respectively. The increase of $0.4 million in R&D expense for the three months ended September 23, 2012, compared to the prior year comparable period, was primarily a result of increased material costs and higher salary and stock compensation expense, offset by a decrease in incentive bonus. We expect to decrease spending levels for new product development over the next year as part of our cost reduction initiatives.

Amortization of acquisition-related intangible assets

(Dollars in                                     Three Months Ended
thousands)
                        September                            September
                         23, 2012        % of Revenues        25, 2011        % of Revenues           Change
Amortization of
acquisition-related
intangible assets      $      1,680                 0.7 %   $      2,615                 0.9 %       (0.2)ppt

Amortization of acquisition-related intangible assets was $1.7 million (0.7 percent of revenues) and $2.6 million (0.9 percent of revenues) for the three months ended September 23, 2012 and September 25, 2011, respectively. The decrease of $0.9 million for the three months ended September 23, 2012, compared to the prior year period, was primarily a result of the full amortization of various intangible assets during the second half of fiscal year 2012.

Asset Impairment, Restructuring and Other Charges

Asset impairment, restructuring and other charges reflect the impact of certain cost reduction programs and initiatives implemented by us. These programs and initiatives include the closing of facilities, the termination of employees and other related activities. Asset impairment, restructuring and other charges include program-specific exit costs, severance benefits pursuant to an ongoing benefit arrangement, and special termination benefits. Severance costs unrelated to our restructuring initiatives are recorded as an element of cost of sales, research and development ("R&D") or selling, general and administrative expense ("SG&A"), depending upon the classification and function of the employee terminated. Restructuring costs were expensed during the period in which all requirements of recognition were met.

During the first quarter of fiscal year 2013, we announced a restructuring plan to modify our manufacturing strategy and lower operating expenses in order to align our cost structure with business conditions. As part of the plan, we expect to incur costs recorded in asset impairment, restructuring and other charges related primarily to the following:

Fiscal Year 2013 El Segundo Fabrication Facility Closure Initiative

Fiscal Year 2013 Newport Fabrication Facility Resizing Initiative

Fiscal Year 2013 Other Cost Reduction Activities Initiative


Table of Contents

The following tables summarize the total asset impairment, restructuring and other charges by initiative for the three months ended September 23, 2012 (in thousands):

                                                                    Three Months Ended
                                                                    September 23, 2012
                                                                   Fiscal Year       Fiscal Year
                                            Fiscal Year 2013       2013 Newport       2013 Other
                                               El Segundo          Fabrication           Cost
                                              Fabrication            Facility         Reduction
                                            Facility Closure         Resizing         Activities
                                               Initiative           Initiative        Initiative        Total
Reported in asset impairment,
restructuring and other charges:
Asset impairment                           $                -     $            -     $          -     $       -
Severance and workforce reduction costs                 5,687                  -            3,279         8,966
Decommissioning costs                                       -                  -                -             -
Total asset impairment, restructuring
and other charges                          $            5,687     $            -     $      3,279     $   8,966

In addition to the amounts in the table above, $0.9 million of other charges related to the restructuring initiatives were recorded in cost of sales during the three months ended September 23, 2012. These charges, which were for accelerated depreciation and inventory write-downs, are not classifiable as restructuring costs, and were therefore recorded in cost of sales.

The following table summarizes changes our restructuring related accruals for the three months ended September 23, 2012, which are included in accrued salaries, wages, and benefits on the balance sheet (in thousands):

                                            Fiscal Year
                                              2013 El         Fiscal Year       Fiscal Year
                                              Segundo         2013 Newport       2013 Other
                                            Fabrication       Fabrication           Cost
                                             Facility           Facility         Reduction
                                              Closure           Resizing         Activities
                                            Initiative         Initiative        Initiative        Total
Accrued severance and workforce
reduction costs at June 24, 2012           $           -     $            -     $          -     $       -
Accrued during the period and charged to
asset impairment, restructuring and
other charges                                      5,687                  -            3,279         8,966
Costs paid during the period                        (829 )                -           (1,869 )      (2,698 )
Accrued severance and workforce
reduction costs at September 23, 2012      $       4,858     $            -     $      1,410     $   6,268


Table of Contents
Fiscal Year 2013 Initiatives

Fiscal Year 2013 El Segundo Fabrication Facility Closure Initiative

During the first quarter of fiscal year 2013, we adopted a restructuring plan to close our El Segundo wafer fabrication facility by the third quarter of fiscal year 2013 with estimated total pre-tax costs of $9.0 million. These consist of $5.7 million of severance and workforce reduction costs, $2.1 million of decommissioning costs, and $1.2 million of relocation and re-qualification costs. The restructuring charge recorded during the three months ended September 23, 2012 included $5.7 million of severance costs and workforce reduction costs. In addition, during the three months ended September 23, 2012, we recorded $0.9 million of other charges related to the restructuring initiative in cost of sales that affected the ESP reporting segment. These other charges, which were for accelerated depreciation and inventory write-downs, are not classifiable as restructuring costs, and were therefore recorded in cost of sales.

During the first quarter of fiscal year 2013, cash payments for this initiative were $0.8 million and are estimated to be approximately $6.2 million and $2.0 million for the remainder of fiscal year 2013, and thereafter, respectively.
After the completion of this initiative, we estimate annual cost savings of approximately $10 million. These cost savings are the result of reduced manufacturing overhead costs, which will impact cost of sales. We do not anticipate these overhead cost savings to be offset by additional costs incurred in other locations.
Fiscal Year 2013 Newport, Wales Fabrication Facility Resizing Initiative

. . .

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