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IRF > SEC Filings for IRF > Form 10-Q on 31-Oct-2013All Recent SEC Filings

Show all filings for INTERNATIONAL RECTIFIER CORP /DE/

Form 10-Q for INTERNATIONAL RECTIFIER CORP /DE/


31-Oct-2013

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 20, 2013 ("2013 Annual Report"). Except for historic information contained herein, the matters addressed in this MD&A constitute "forward­looking 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. Forward­looking statements may be identified by the use of terms such as "anticipate," "believe," "expect," "intend," "project," "will," and similar expressions. Such forward­looking 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 forward­looking 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 consolidated financial statements and accompanying notes for the year ended June 30, 2013. The discussion includes:

• Overview

• Results of Operations

• Liquidity and Capital Resources

• Critical Accounting Polices and Estimates

Overview

Our revenues were $269.8 million and $252.5 million for the three months ended September 29, 2013 and September 23, 2012, respectively. This revenue increase of $17.3 million or 6.8 percent, was primarily due to increases in customer demand, partially offset by price erosion in certain of our business segments. We currently expect revenues for the second quarter of fiscal year 2014 to be between $260 million and $270 million.

Our gross margin percentage improved by 7.4 percentage points to 35.3 percent for the three months ended September 29, 2013 compared to the three months ended September 23, 2012. The increase in gross margin percentage was mainly a result of an improvement in factory utilization, partially offset by price erosion in certain of our business segments. We currently expect our gross margin percentage for the second quarter of fiscal year 2014 to be between 34.3 percent and 35.3 percent.

Our SG&A expenses decreased by $3.5 million for the three months ended September 29, 2013, compared to the three months ended September 23, 2012. The decrease in SG&A expenses was primarily due to a decrease in legal services, claims and litigation accruals, and headcount related expenses, offset by increased bonus, equity compensation and commissions expense. We will continue to identify additional SG&A cost savings in order to seek to maintain our total of such expenses at approximately $45 million per quarter when our business is operating at higher revenue levels, even as certain costs (such as incentive bonuses and freight costs) scale upward with increasing revenue.

R&D expenses decreased $1.3 million for the three months ended September 29, 2013, compared to the three months ended September 23, 2012. The decrease in R&D expenses was primarily due to lower headcount costs and lower material costs, partially offset by higher bonus and stock compensation expense. We expect R&D expenses to remain near the current level as we continue to make additional investments associated with engineering builds to qualify new products and other advanced technologies.


Table of Contents

During the three months ended September 29, 2013, we continued to implement initiatives to consolidate our internal manufacturing footprint and otherwise reduce costs. We also continued efforts to increase our manufacturing flexibility by qualifying additional technologies and higher value-added products and programs with our contract wafer fabrication and assembly and test suppliers. In the near-term we have targeted external contractors for up to 30 percent of our wafer fabrication needs, and around 75 percent of our packaging needs. Going forward, we plan to further expand our use of external contractors for up to 50 percent of our wafer fabrication needs and around 80 percent of our packaging needs. 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 in future periods.

In August 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 closed our El Segundo wafer fabrication facility in March 2013. As an additional part of the plan, the resizing of our Newport, Wales fabrication facility is expected to continue in several phases through the first half of calendar year 2015. Further, we completed the other cost reduction activities initiative in fiscal year 2013 to reduce our manufacturing footprint in our Mexico, California, and Arizona facilities, and to reduce administrative and research and development costs around the world.

In conjunction with our ongoing restructuring plan, we incurred approximately $1.2 million of equipment relocation and re-qualification costs, $0.1 million of severance and workforce reduction costs, and $0.1 million of decommissioning costs during the three months ended September 29, 2013. We anticipate that we will incur restructuring charges during fiscal year 2014 of approximately $6.1 million (See Part I, Item 1, Notes to Consolidated Financial Statements-Note 12, "Asset Impairment, Restructuring and Other Charges").

Our cash flows from operating activities provided $24.8 million of cash during the three months ended September 29, 2013 compared to $6.5 million for prior year comparable period. Our cash, cash equivalents and investments as of September 29, 2013 totaled $478.1 million (excluding restricted cash of $1.4 million), compared to $454.5 million (excluding restricted cash of $1.3 million) as of June 30, 2013. The increase in our cash, cash equivalents and investments was primarily due to net income during the period, which included significant non-cash charges that contributed positively to cash flows from operating activities.

Segment Reporting

For the description of our reportable segments, see Note 13, "Segment Information", to our Consolidated Financial Statements set forth in Part I, Item 1.

Four of our five Customer Segments (as identified below), 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 end 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 Customer Segment, HiRel. For ease of reference, we refer to these four segments collectively as our "Commercial Segments." What we refer to as our "Customer Segments" include our PMD, ESP, AP, EP and HiRel reporting segments, and excludes the IP segment.


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Results of Operations

Selected Operating Results

The following table sets forth certain items included in selected financial data
as a percentage of revenues (in millions, except percentages):

                                                                        Three Months Ended
                                                          September 29, 2013           September 23, 2012
Revenues                                              $    269.8          100.0 %   $   252.5       100.0  %
Cost of sales                                              174.4           64.7         182.0        72.1
Gross profit                                                95.3           35.3          70.5        27.9
Selling, general and administrative expense                 43.8           16.2          47.3        18.7
Research and development expense                            32.2           11.9          33.4        13.2
Amortization of acquisition­related intangible assets        1.6            0.6           1.7         0.7
Asset impairment, restructuring and other charges            1.4            0.5           9.0         3.6
Operating income (loss)                                     16.4            6.1         (20.8 )      (8.3 )
Other expense, net                                           0.8            0.3           1.0         0.4
Interest income, net                                         0.0              -           0.0           -
Income (loss) before income taxes                           15.6            5.8         (21.8 )      (8.6 )
Provision for income taxes                                   6.9            2.5           7.0         2.8
Net income (loss)                                     $      8.7            3.2 %   $   (28.8 )     (11.4 )%

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


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Revenues and Gross Margin - Three Months Ended

The following table summarizes revenues and gross margin by reportable segment
for the three months ended September 29, 2013 compared to the three months ended
September 23, 2012. The amounts in the following table are in thousands:
                                                 Three Months Ended
                           September 29, 2013                           September 23, 2012                        Change
                                                  Gross                                        Gross                      Gross
                Revenues       Gross Margin     Margin %     Revenues       Gross Margin     Margin %    Revenues %    Margin ppt
Power
Management
Devices (PMD)  $ 101,966     $       31,464      30.9 %     $  90,826     $       18,545      20.4 %         12.3  %     10.5
Energy Saving
Products (ESP)    50,497             16,574      32.8          44,455              6,255      14.1           13.6        18.7
Automotive
Products (AP)     36,463             11,822      32.4          28,838              3,000      10.4           26.4        22.0
Enterprise
Power (EP)        32,249             12,074      37.4          37,809             14,362      38.0          (14.7 )      (0.6 )
  Commercial
Segments total   221,175             71,934      32.5         201,928             42,162      20.9            9.5        11.6
HiRel             48,333             23,135      47.9          48,416             26,891      55.5           (0.2 )      (7.6 )
  Customer
segments total   269,508             95,069      35.3         250,344             69,053      27.6            7.7         7.7
Intellectual
Property (IP)        242                242     100.0           2,148              1,488      69.3          (88.7 )      30.7
  Consolidated
total          $ 269,750     $       95,311      35.3 %     $ 252,492     $       70,541      27.9 %          6.8  %      7.4

Revenues

Revenues from all our segments for the three months ended September 29, 2013, taken as a whole, increased by $17.3 million, or 6.8 percent compared to the prior year comparable period. Revenues from our Customer Segments (which excludes the IP segment), taken as a whole, increased by $19.2 million, or 7.7 percent, for the three months ended September 29, 2013 as compared to the prior year comparable period. Revenues for our Commercial Segments, taken as a whole, increased by $19.2 million, or 9.5 percent compared to the prior year comparable period.

For the three months ended September 29, 2013, within our Commercial Segments, AP revenue increased by 26.4 percent compared to the prior year comparable period primarily due to increased demand for new MOSFET and IPS products. Revenues for our ESP segment increased by 13.6 percent compared to the prior year comparable period due to increased demand for our consumer and appliance related products including IGBT's and IRAM modules, as well as a continued recovery from general market slowdowns mainly in Asia, partially offset by price erosion primarily in HVIC and IGBT products. Revenues for our PMD segment increased 12.3 percent compared to the prior year comparable period due to an increase in demand for our computing components, industrial and consumer products, and gaming console components, partially offset by general price erosion. Revenues for our EP segment decreased by 14.7 percent compared to the prior year comparable period due to a decrease in demand for prior generation server components and loss of market share in current generation server components, partially offset by increased demand for our communication related products.

For the three months ended September 29, 2013, our HiRel segment revenues decreased by 0.2 percent compared to the prior year comparable period, primarily driven by a non-recurring quality related issue associated with a certain product, partially offset by an increase in shipments for RAD-Hard discrete products.

For the three months ended September 29, 2013, our IP segment revenues decreased by $1.9 million or 88.7 percent, to $0.2 million compared to the prior year comparable period, primarily due to a one-time sale of patents in the prior year comparable period. We expect our IP segment revenues will be approximately $0.2 million per quarter in each of the next several quarters. However, we intend to continue to seek sale and/or licensing opportunities consistent with our business strategy.


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Gross Margin

Our gross margin percentage increased by 7.4 percentage points to 35.3 percent for the three months ended September 29, 2013 compared to 27.9 percent for the prior year comparable period. This increase in our gross margin percentage was primarily the result of an increase of 11.6 percentage points in gross margin for our Commercial Segments taken as a whole, partially offset by a decrease of 7.6 percentage points in gross margin for our HiRel segment. The increase in gross margin for our Commercial Segments taken as a whole, was primarily driven by improved factory utilization, thereby lowering manufacturing costs. The decrease in gross margin for our HiRel Segment was primarily due to shipment of higher cost material in the current period and a non-recurring quality related issue associated with a certain product.

Our ESP segment's gross margin increased from 14.1 percent for the three months ended September 23, 2012, to 32.8 percent for the three months ended September 29, 2013, primarily due to improved factory utilization. Our ESP segment has also been favorably impacted by the cost savings associated with the fiscal year 2013 closure of our fabrication facility in El Segundo, California. Our AP segment's gross margin increased from 10.4 percent for the three months ended September 23, 2012, to 32.4 percent for the three months ended September 29, 2013, primarily due to improved factory utilization and improved MOSFET product mix. Our PMD segment's gross margin increased from 20.4 percent for the three months ended September 23, 2012, to 30.9 percent for the three months ended September 29, 2013, primarily due to improved factory utilization, partially offset by price erosion. Our EP segment's gross margin decreased from 38.0 percent for the three months ended September 23, 2012, to 37.4 percent for the three months ended September 29, 2013, primarily due to price erosion and a less favorable product mix as a result of a decrease in its server business, which tends to have higher gross margins relative to our EP segment's other business.

Our HiRel segment's gross margin percentage declined by 7.6 percentage points for the three months ended September 29, 2013 compared to the prior year comparable period. The decrease in gross margin for our HiRel Segment was primarily due to shipment of higher cost material in the current period and a non-recurring quality related issue associated with a certain product.

Our IP segment's gross margin percentage increased by 30.7 percentage points for the three months ended September 29, 2013 compared to the prior year comparable period due to costs associated with the one-time sale of patents in the prior year comparable period.

Selling, General and Administrative Expense

                                                       Three Months Ended
     (Dollar amounts in        September 29,                      September 23,
         thousands)                 2013         % of Revenues         2012         % of Revenues      Change
Selling, General and
Administrative Expense         $     43,750            16.2 %     $     47,295            18.7 %     (2.5) ppt

Our SG&A expenses decreased by $3.5 million for the three months ended September 29, 2013, compared to the three months ended September 23, 2012. The decrease in SG&A expenses was primarily due to a decrease in legal services, claims and litigation accruals, and headcount related expenses, partially offset by increased bonus, stock compensation, and commissions expense.


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Research and Development Expense

                                                           Three Months Ended
 (Dollar amounts in thousands)     September 29,                      September 23,
                                        2013         % of Revenues         2012         % of Revenues      Change
Research and Development Expense   $     32,173            11.9 %     $     33,449            13.2 %     (1.3) ppt

R&D expenses decreased by $1.3 million for the three months ended September 29, 2013, compared to the three months ended September 23, 2012. The decrease in R&D expenses was primarily due to lower headcount costs and lower material costs, partially offset by higher bonus and stock compensation expense.

Amortization of Acquisition-Related Intangible Assets

Amortization of acquisition-related intangible assets was $1.6 million (0.6 percent of revenues) and $1.7 million (0.7 percent of revenues) for the three months ended September 29, 2013 and September 23, 2012, respectively. The decrease of $0.1 million for the three months ended September 29, 2013 compared to the three months ended September 23, 2012 was the result of the full amortization of a certain intangible asset in the second half of the previous fiscal year.

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, R&D, or SG&A, depending upon the classification and function of the employment position terminated. Restructuring costs are expensed during the period in which all requirements of recognition are 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 are incurring 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 29, 2013 and September 23, 2012 (in thousands):

                                                              Three Months Ended
                                                              September 29, 2013
                                                             Newport
                                         El Segundo        Fabrication        Other 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 (recoveries)                             (13 )               141                  -           128
Decommissioning costs                            -                  84                  -            84
Relocation and re-qualification costs            4               1,186                  -         1,190
Total asset impairment, restructuring
and other charges (recoveries)        $         (9 )     $       1,411     $            -     $   1,402



                                                                   Three Months Ended
                                                                   September 23, 2012
                                                                  Newport            Other Cost
                                           El Segundo           Fabrication           Reduction
                                      Fabrication Facility   Facility Resizing       Activities
                                       Closure 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                                  -                   -                     -             -
Relocation and re-qualification costs                  -                   -                     -             -
Total asset impairment, restructuring
and other charges                     $            5,687     $             -     $           3,279     $   8,966

In addition to the amounts in the tables above, $0.4 million and $0.9 million of other charges related to the restructuring initiatives were recorded in cost of sales during the three months ended September 29, 2013 and September 23, 2012, respectively. 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 in our restructuring related accruals related to our fiscal year 2013 initiatives for the three months ended September 29, 2013, which are included in accrued salaries, wages, and benefits on the balance sheet (in thousands):

                                                                 Newport
                                           El Segundo          Fabrication        Other Cost
                                           Fabrication          Facility          Reduction
                                        Facility Closure        Resizing          Activities
                                           Initiative          Initiative         Initiative         Total
Accrued severance and workforce
reduction costs at June 30, 2013       $             197     $           -     $            -     $     197
Accrued (recovered) during the period
and charged to asset impairment,
restructuring and other charges                      (13 )             141                  -           128
Costs paid during the period                           -                 -                  -             -
Accrued severance and workforce
reduction costs at September 29, 2013  $             184     $         141     $            -     $     325


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Fiscal Year 2013 El Segundo Fabrication Facility Closure Initiative

During fiscal year 2013, we adopted a restructuring plan and closed our El Segundo wafer fabrication facility in March 2013. During the three months ended September 29, 2013, we incurred de minimis asset impairment, restructuring and other charges (recoveries). We incurred asset impairment, restructuring and other charges of $5.7 million during the three months ended September 23, 2012. In connection with the plan, we estimate total pre-tax costs of $7.0 million. The estimated total costs consist of $5.9 million of severance and workforce reduction costs, $0.9 million of relocation and re-qualification costs, and $0.2 million of asset impairment costs.

In addition to the restructuring charges above, we recorded $0.9 million of other charges related to the restructuring initiative in cost of sales for the three months ended September 23, 2012. These other charges, which were for accelerated depreciation and inventory write-downs, are not classifiable as restructuring costs, and affected the Energy Saving Products reporting segment. We recorded no such charges during the three months ended September 29, 2013.

During the three months ended September 29, 2013, we made no cash payments for this initiative. During the three months ended September 23, 2012, cash payments for this initiative were $0.8 million. Cash payments are estimated to be approximately $0.5 million through June 2015. We estimate annual cost savings of approximately $10 million for fiscal year 2014 and thereafter compared to our fourth quarter 2012 run rate. These cost savings are the result of reduced manufacturuing 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.

In addition, we estimate we will make total cash expenditures of $2.5 million for the decommissioning and restoration of this fabrication facility. These costs were previously considered as part of the asset impairment of the El Segundo Fabrication Facility recorded in the fourth quarter of fiscal year 2012, and are not anticipated to result in additional restructuring charges.

Fiscal Year 2013 Newport Fabrication Facility Resizing Initiative

. . .

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