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IRF > SEC Filings for IRF > Form 10-Q on 30-Jan-2014All Recent SEC Filings

Show all filings for INTERNATIONAL RECTIFIER CORP /DE/

Form 10-Q for INTERNATIONAL RECTIFIER CORP /DE/


30-Jan-2014

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 condensed consolidated financial statements and accompanying notes for the three and six months ended December 29, 2013. The discussion includes:

• Overview

• Results of Operations

• Liquidity and Capital Resources

• Critical Accounting Polices and Estimates

Overview

Our revenues were $270.0 million and $223.8 million for the three months ended December 29, 2013 and December 23, 2012, respectively, and $539.7 million and $476.3 million for the six months ended December 29, 2013 and December 23, 2012, respectively. For the three and six months ended December 29, 2013, the revenue increases of $46.1 million or 20.6 percent, and $63.4 million or 13.3 percent, respectively, were primarily due to increases in customer demand in our PMD, ESP, and AP segments. We currently expect revenues for the third quarter of fiscal year 2014 to be between $265 million and $275 million.

Our gross margin percentage improved by14.4 percentage points to 36.3 percent and by 10.7 percentage points to 35.8 percent for the three and six months ended December 29, 2013, compared to the three and six months ended December 23, 2012, respectively. The increase in gross margin percentage was mainly a result of an improvement in factory utilization and a decrease in manufacturing costs. We currently expect our gross margin percentage for the third quarter of fiscal year 2014 to be between 35.3 percent and 36.3 percent.

Our SG&A expense decreased by $0.4 million and $3.9 million for the three and six months ended December 29, 2013, compared to the three and six months ended December 23, 2012, respectively. The decrease in SG&A expense was primarily due to a decrease in legal services expense and headcount related expenses, partially offset by increased bonus expense and stock compensation expense. We are continuing to identify additional SG&A cost savings in order to maintain our total of such expenses at approximately $45 million per quarter, even as certain costs (such as incentive bonuses and freight costs) scale upward with increasing revenues and operating income.

R&D expense increased by $0.7 million and decreased by $0.6 million for the three and six months ended December 29, 2013, compared to the three and six months ended December 23, 2012, respectively. The increase in R&D expense for the three months ended December 29, 2013 compared to the prior year comparable period was primarily due to higher bonus expense and stock compensation expense, partially offset by an asset impairment expense for the three months ended December 23, 2012. The decrease in R&D expense for the six months ended December 29, 2013 compared to the prior year comparable period was primarily due to lower material related costs, partially offset by the higher bonus expense and stock compensation expense. We currently expect R&D expenses to be around $33 million for the third quarter of fiscal year 2014 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 and six months ended December 29, 2013, we continued to focus on consolidating our internal manufacturing footprint and otherwise reducing 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 short-term, we have targeted using external contractors for around 30 percent of our wafer fabrication needs, and around 75 percent of our packaging needs. In the longer-term, 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 internal manufacturing 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 to align our cost structure with 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, we are resizing our Newport, Wales fabrication facility in several phases, and expect to complete the resizing by the first half of calendar year 2015. Further, as part of the plan, 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 $0.9 million and $2.1 million of equipment relocation and re-qualification costs, $0.1 million and $0.2 million of decommissioning costs, and de minimis and $0.1 million of severance and workforce reduction costs during the three and six months ended December 29, 2013, respectively. We anticipate that we will incur restructuring charges during fiscal year 2014 of approximately $4.6 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 $58.2 million of cash during the six months ended December 29, 2013 compared to $48.5 million for the prior year comparable period. Our cash, cash equivalents and investments as of December 29, 2013 totaled $503.5 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 cash provided by operating activities and proceeds from the exercise of stock options, partially offset by capital related purchases.

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.


Table of Contents

Results of Operations

Selected Operating Results

The following table sets forth certain operating results for the three and six
months ended December 29, 2013 and December 23, 2012 as a percentage of revenues
(in millions, except percentages):

                                      Three Months Ended                                   Six Months Ended
                          December 29, 2013        December 23, 2012          December 29, 2013         December 23, 2012
Revenues                $   270.0     100.0  %   $   223.8     100.0  %   $    539.7        100.0 %   $   476.3     100.0  %
Cost of sales               172.0      63.7          174.7      78.1           346.4         64.2         356.7      74.9
Gross profit                 98.0      36.3           49.1      21.9           193.3         35.8         119.6      25.1
Selling, general and
administrative expense       44.7      16.6           45.1      20.1            88.5         16.4          92.4      19.4
Research and
development expense          32.8      12.1           32.1      14.4            65.0         12.0          65.6      13.8
Amortization of
acquisition­related
intangible assets             1.6       0.6            1.7       0.8             3.3          0.6           3.4       0.7
Asset impairment,
restructuring and other
charges                       1.0       0.4            4.9       2.2             2.4          0.4          13.9       2.9
Operating income (loss)      17.8       6.6          (34.7 )   (15.5 )          34.2          6.3         (55.6 )   (11.7 )
Other expense, net            1.5       0.6            0.4       0.2             2.3          0.4           1.4       0.3
Interest income, net          0.0         -            0.0         -             0.0            -           0.0         -
Income (loss) before
income taxes                 16.3       6.0          (35.1 )   (15.7 )          31.9          5.9         (57.0 )   (12.0 )
Provision for income
taxes                        (1.6 )    (0.6 )         (2.4 )    (1.1 )           5.2          1.0           4.5       0.9

Net income (loss) $ 17.9 6.6 % $ (32.7 ) (14.6 )% $ 26.6 4.9 % $ (61.5 ) (12.9 )%

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


Table of Contents

Revenues and Gross Margin - Three Months Ended

The following table summarizes revenues and gross margin by reportable segment
for the three months ended December 29, 2013 compared to the three months ended
December 23, 2012. The amounts in the following table are in thousands:
                                                 Three Months Ended
                           December 29, 2013                            December 23, 2012                        Change
                                                                                                                        Gross
                                                  Gross                                        Gross                    Margin
                Revenues       Gross Margin     Margin %     Revenues       Gross Margin     Margin %    Revenues %      ppt
Power
Management
Devices (PMD)  $ 102,878     $       30,905      30.0 %     $  83,273     $       12,084      14.5 %         23.5 %      15.5
Energy Saving
Products (ESP)    46,589             14,693      31.5          36,174              5,369      14.8           28.8        16.7
Automotive
Products (AP)     36,364             11,354      31.2          28,414              3,164      11.1           28.0        20.1
Enterprise
Power (EP)        33,195             14,073      42.4          28,649              7,164      25.0           15.9        17.4
  Commercial
Segments total   219,026             71,025      32.4         176,510             27,781      15.7           24.1        16.7
HiRel             50,665             26,666      52.6          47,061             21,057      44.7            7.7         7.9
  Customer
Segments total   269,691             97,691      36.2         223,571             48,838      21.8           20.6        14.4
Intellectual
Property (IP)        274                274     100.0             251                251     100.0            9.2         0.0
  Consolidated
total          $ 269,965     $       97,965      36.3 %     $ 223,822     $       49,089      21.9 %         20.6 %      14.4

Revenues

Revenues from all our segments for the three months ended December 29, 2013, taken as a whole, increased by $46.1 million, or 20.6 percent compared to the prior year comparable period. Revenues from our Customer Segments taken as a whole, increased by $46.1 million, or 20.6 percent, for the three months ended December 29, 2013 as compared to the prior year comparable period. Revenues for our Commercial Segments, taken as a whole, increased by $42.5 million, or 24.1 percent compared to the prior year comparable period.

For the three months ended December 29, 2013, within our Commercial Segments, revenues for our ESP segment increased by 28.8 percent compared to the prior year comparable period due to increased demand for our consumer and appliance related products, including HVICs, IGBTs and IRAM modules, as well as continued recovery in general market conditions, mainly in Asia. Revenues for our AP segment increased by 28.0 percent compared to the prior year comparable period primarily due to increased demand for MOSFET and intelligent power switch IC products. Revenues for our PMD segment increased by 23.5 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 price erosion. Revenues for our EP segment increased by 15.9 percent compared to the prior year comparable period due to an increase in demand for digital controllers, gaming console components, and high-end computing products.

For the three months ended December 29, 2013, our HiRel segment revenues increased by 7.7 percent compared to the prior year comparable period, primarily driven by an increase in shipments for integrated power modules, DC-DC converters, and RAD-Hard discrete products.

For the three months ended December 29, 2013, our IP segment revenues increased by 9.2 percent to $0.3 million compared to 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.


Table of Contents

Gross Margin

Our gross margin percentage increased by 14.4 percentage points to 36.3 percent for the three months ended December 29, 2013, compared to 21.9 percent for the prior year comparable period. This increase in our gross margin percentage was primarily the result of an increase of 16.7 percentage points in gross margin for our Commercial Segments taken as a whole, and an increase of 7.9 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 and lower manufacturing costs. The increase in gross margin for our HiRel Segment was primarily due to lower manufacturing costs.

Our ESP segment's gross margin increased from 14.8 percent for the three months ended December 23, 2012, to 31.5 percent for the three months ended December 29, 2013, primarily due to improved factory utilization and lower inventory excess and obsolescence expense. Our ESP segment has also been favorably impacted by 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 11.1 percent for the three months ended December 23, 2012, to 31.2 percent for the three months ended December 29, 2013, primarily due to improved factory utilization and improved MOSFET and intelligent power switch IC product mix, partially offset by price erosion. Our PMD segment's gross margin increased from 14.5 percent for the three months ended December 23, 2012, to 30.0 percent for the three months ended December 29, 2013, primarily due to improved factory utilization and lower manufacturing costs, partially offset by price erosion. Our EP segment's gross margin increased from 25.0 percent for the three months ended December 23, 2012, to 42.4 percent for the three months ended December 29, 2013, primarily due to lower manufacturing costs and lower inventory excess and obsolescence expense.

Our HiRel segment's gross margin increased from 44.7 percent for the three months ended December 23, 2012 to 52.6 percent for the three months ended December 29, 2013, primarily due to lower manufacturing costs.

Our IP segment's gross margin percentage did not change compared to the prior year comparable period.


Table of Contents

Revenues and Gross Margin - Six Months Ended

The following table summarizes revenues and gross margin by reportable segment
for the six months ended December 29, 2013 compared to the six months ended
December 23, 2012. The amounts in the following table are in thousands:
                                                  Six Months Ended
                           December 29, 2013                            December 23, 2012                        Change
                                                                                                                        Gross
                                                  Gross                                        Gross                    Margin
                Revenues       Gross Margin     Margin %     Revenues       Gross Margin     Margin %    Revenues %      ppt
Power
Management
Devices (PMD)  $ 204,844     $       62,369      30.4 %     $ 174,100     $       30,628      17.6 %         17.7  %     12.8
Energy Saving
Products (ESP)    97,086             31,267      32.2          80,629             11,625      14.4           20.4        17.8
Automotive
Products (AP)     72,827             23,176      31.8          57,252              6,164      10.8           27.2        21.0
Enterprise
Power (EP)        65,444             26,147      40.0          66,458             21,526      32.4           (1.5 )       7.6
  Commercial
Segments total   440,201            142,959      32.5         378,439             69,943      18.5           16.3        14.0
HiRel             98,998             49,801      50.3          95,477             47,949      50.2            3.7         0.1
  Customer
Segments total   539,199            192,760      35.7         473,916            117,892      24.9           13.8        10.8
Intellectual
Property (IP)        516                516     100.0           2,398              1,738      72.5          (78.5 )      27.5
  Consolidated
total          $ 539,715     $      193,276      35.8 %     $ 476,314     $      119,630      25.1 %         13.3  %     10.7

Revenues

Revenues from all our segments for the six months ended December 29, 2013, taken as a whole, increased by $63.4 million, or 13.3 percent compared to the prior year comparable period. Revenues from our Customer Segments taken as a whole, increased by $65.3 million, or 13.8 percent, for the six months ended December 29, 2013 as compared to the prior year comparable period. Revenues for our Commercial Segments, taken as a whole, increased by $61.8 million, or 16.3 percent compared to the prior year comparable period.

For the six months ended December 29, 2013, within our Commercial Segments, revenues for our AP segment increased by 27.2 percent compared to the prior year comparable period, primarily due to increased demand for MOSFET and intelligent power switch IC products. Revenues for our ESP segment increased by 20.4 percent compared to the prior year comparable period due to increased demand for our consumer and appliance related products including HVIC's, IGBT's and IRAM modules, as well as a continued recovery in general market conditions, mainly in Asia, partially offset by product mix, primarily in HVIC products. Revenues for our PMD segment increased 17.7 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 price erosion. Revenues for our EP segment decreased by 1.5 percent compared to the prior year comparable period due to a decrease in demand for server components, partially offset by increased demand for our digital controller and PowIRstage products.

For the six months ended December 29, 2013, our HiRel segment revenues increased by 3.7 percent compared to the prior year comparable period, primarily driven by an increase in shipments for integrated power modules and RAD-Hard discrete products.

For the six months ended December 29, 2013, our IP segment revenues decreased by $1.9 million or 78.5 percent, to $0.5 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.


Table of Contents

Gross Margin

Our gross margin percentage increased by 10.7 percentage points to 35.8 percent for the six months ended December 29, 2013 compared to 25.1 percent for the prior year comparable period. This increase in our gross margin percentage was primarily the result of an increase of 14.0 percentage points in gross margin for our Commercial Segments taken as a whole. The increase in gross margin for our Commercial Segments taken as a whole was primarily driven by improved factory utilization and lower manufacturing costs.

Our ESP segment's gross margin increased from 14.4 percent for the six months ended December 23, 2012, to 32.2 percent for the six months ended December 29, 2013, primarily due to improved factory utilization and lower inventory excess and obsolescence expense, partially offset by increased sales of lower margin HVIC products. Our ESP segment has also been favorably impacted by 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 10.8 percent for the six months ended December 23, 2012, to 31.8 percent for the six months ended December 29, 2013, primarily due to improved factory utilization and improved MOSFET and intelligent power switch IC product mix. Our PMD segment's gross margin increased from 17.6 percent for the six months ended December 23, 2012, to 30.4 percent for the six months ended December 29, 2013, primarily due to improved factory utilization, partially offset by price erosion. Our EP segment's gross margin increased from 32.4 percent for the six months ended December 23, 2012, to 40.0 percent for the six months ended December 29, 2013, primarily due to lower manufacturing costs and lower inventory excess and obsolescence expense.

Our HiRel segment's gross margin percentage remained relatively flat for the six months ended December 29, 2013 compared to the prior year comparable period.

Our IP segment's gross margin percentage increased by 27.5 percentage points for the six months ended December 29, 2013 compared to the prior year comparable period due to costs associated with a one-time sale of patents in the prior year comparable period.

Selling, General and Administrative Expense

                                            Selling, General and Administrative Expense
(Dollar amounts in thousands)    December 29,                       December 23,
                                     2013          % of Revenues        2012         % of Revenues      Change
Three months ended              $      44,727            16.6 %     $    45,083            20.1 %     (3.5) ppt
Six months ended                $      88,477            16.4 %     $    92,378            19.4 %     (3.0) ppt

Our SG&A expense decreased by $0.4 million and $3.9 million for the three and six months ended December 29, 2013, respectively, compared to the prior year comparable periods. The decrease in SG&A expense was primarily due to a decrease in legal services expense and headcount related expenses, partially offset by increased bonus expense and stock compensation expense.


Table of Contents

Research and Development Expense

                                                    Research and Development Expense
(Dollar amounts in thousands)                                            December 23,
                                 December 29, 2013      % of Revenues        2012         % of Revenues      Change
Three months ended              $       32,786                12.1 %     $    32,125            14.4 %     (2.3) ppt
Six months ended                $       64,959                12.0 %     $    65,574            13.8 %     (1.8) ppt

R&D expense increased by $0.7 million and decreased by $0.6 million for the three and six months ended December 29, 2013, respectively, compared to the prior year comparable periods. The increase in R&D expense for the three months ended December 29, 2013 compared to the prior year comparable period was primarily due to higher bonus expense and stock compensation expense, partially offset by an asset impairment expense for the three months ended December 23, 2012. The decrease in R&D expense for the six months ended December 29, 2013 compared to the prior year comparable period was primarily due to lower material costs, partially offset by higher bonus expense and stock compensation expense.

Amortization of Acquisition-Related Intangible Assets

                                        Amortization of Acquisition-Related Intangible Assets
(Dollar amounts in thousands)                                          December 23,
                                December 29, 2013     % of Revenues        2012         % of Revenues      Change
Three months ended              $          1,630            0.6 %      $     1,680            0.8 %      (0.2) ppt
Six months ended                $          3,260            0.6 %      $     3,360            0.7 %      (0.1) ppt

Amortization of acquisition-related intangible assets decreased by $0.1 million for each of the three and six months ended December 29, 2013 compared to the . . .

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