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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended June 30, 1996
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 1-7935
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INTERNATIONAL RECTIFIER CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-1528961
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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233 KANSAS STREET
EL SEGUNDO, CA 90245
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (310) 726-8000
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Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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Common Stock, par value $1 New York Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s)), and (2) has been subject to
such filing requirements for the past 90 days. Yes _X_ No ___
The aggregate market value of the registrant's voting Common Stock held by
non-affiliates of the registrant was approximately $656,780,804 (computed using
the closing price of a share of Common Stock on September 24, 1996 reported by
New York Stock Exchange).
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
There were 50,933,932 shares of the registrant's Common Stock, par value
$1.00 per share, outstanding on September 24, 1996.
Portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on November 25, 1996, which Proxy
Statement will be filed no later than 120 days after the close of the
registrant's fiscal year ended June 30, 1996, are incorporated by reference in
Part III of this Annual Report on Form 10-K.
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TABLE OF CONTENTS
PART I
ITEM PAGE
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1. Business............................................................ 1
2. Properties.......................................................... 8
3. Legal Proceedings................................................... 9
4. Submission of Matters to a Vote of the Security Holders............. 10
Additional Item. Directors and Executive Officers of the
Registrant......................................................... 10
PART II
5. Market for the Registrants' Common Equity and Related Stockholders'
Matters............................................................ 12
6. Selected Financial Data............................................. 13
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 14
8. Financial Statements and Supplementary Data......................... 17
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................... 37
PART III
10. Directors and Executive Officers of the Registrant.................. 38
11. Executive Compensation.............................................. 38
12. Security Ownership of Certain Beneficial Owners and Management...... 38
13. Certain Relationships and Related Transactions...................... 38
PART IV
14. Exhibits, Financial Statement Schedule, and Reports................. 38
PART I
ITEM 1. BUSINESS
INTRODUCTION
International Rectifier Corporation ("IR" or the "Company") is a major
worldwide supplier of power semiconductors. Power semiconductors switch or
condition electricity at relatively high voltage and current levels in products
such as power supplies, motor controls, computers/peripherals, automobiles,
portable phones, and electronic lighting ballasts.
The Company designs, manufactures, and markets power semiconductors which
are used for power conversion. In a manner similar to the way that oil is
refined to produce gasoline to power a car, electrical power is converted to
operate equipment. This process of power conversion can be viewed in four
stages: input rectification, control, switching, and output rectification. Input
rectification conditions off-line electricity, typically rectifying
alternating-current to direct-current. The control function measures incoming
electricity and sends a signal to a switch. The switch chops the energy into
small elements. Output rectification re-configures the elements into a form
usable by electrically operated equipment.
IR supplies products that perform each of the four basic functions in power
conversion, and many circuits use more than one type of IR product. This allows
IR to develop products that work together to optimize overall circuit
performance, and enables the Company to capitalize more broadly on market-
leading products.
IR's products are used in all major market sectors. Applications for power
semiconductors in automobiles include anti-lock braking and fuel injection
systems, power accessories, and air bags. Computer/peripheral applications
include power supplies, disk drives, and printers. Office equipment applications
include copiers and facsimile machines. Consumer electronics and lighting
applications include home entertainment, household appliances, and electronic
lighting ballasts. Communications applications include portable phones,
telephone networks, and modems. Power semiconductors are also used widely in
industrial applications such as motor-driven production lines, machine tools,
fork lifts, and welders.
Based on statistics published by the Semiconductor Industry Association (the
"SIA"), the Company believes it is the leader in the power MOSFET (Metal Oxide
Semiconductor Field Effect Transistor) segment with its trademarked HEXFET power
MOSFETs and IGBTs (Insulated Gate Bipolar Transistors). SIA data indicates that
industry-wide sales of power MOSFETs were $2.1 billion in calendar 1995, an
increase of 44% over 1994 levels, and that, over the past five years, power
MOSFET sales have grown at an average rate of 29% per year.
The Company's major customers in the automotive segment include Delco, Ford,
Siemens, and Bosch. International Business Machines, Hewlett Packard, and Compaq
purchase the Company's products in the computer segment. Consumer electronics
customers include Philips and Sony. Customers in the telecommunications segment
include Lucent Technologies and Nokia. The Company also sells its products to
distributors including Arrow Electronics and Future Electronics. In fiscal year
1996, the Company's sales by region were approximately 46% from North America,
28% from Europe, and 26% from Asia. IR has manufacturing facilities in North
America, Europe, and Asia, and uses subcontract assembly in Asia.
IR was founded as a California corporation in 1947 and reincorporated in
Delaware in 1979. Its executive offices are located at 233 Kansas Street, El
Segundo, California 90245 and its telephone number is (310) 726-8000.
POWER SEMICONDUCTOR INDUSTRY
Semiconductors are silicon-based chips that conduct and block electricity.
The semiconductor industry consists of integrated circuits ("ICs") and power
semiconductors. ICs operate at low power levels and perform multiple functions
to process and convey information in electronic signal form. IC
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capability is largely defined by circuit density, which increases as its
features are miniaturized. The applications for ICs are generally concentrated
in the computer industry and have been subject to frequent redesign, short
product life cycles and rapid obsolescence. As a result, the demand for ICs has
been highly cyclical.
In contrast to ICs, power semiconductors operate at higher power levels and
perform a single function: they condition and control electricity to operate a
power supply, control a motor, or light a lamp. Their capability is largely
defined by the level of power that they can handle and their efficiency in
converting raw electric current into a more useful form. The amount of electric
current handled and the heat generated limit the rate at which power
semiconductors can be miniaturized.
Advances in power semiconductor performance and cost-per-function have been
achieved through the use of MOS technology. MOS power transistors (power MOSFETs
and IGBTs) have gained an increasing share of the power transistor market at the
expense of bipolar transistors that also serve the switch function.
MOS power transistors offer significant benefits over bipolar power
transistors. They provide much greater switching speed, which allows the design
of higher frequency, more compact circuits. They are activated by voltage rather
than current, so they require less external circuitry. MOS transistors are more
compatible with microprocessor controls. They offer more reliable long-term
performance and are more rugged, so they can better withstand adverse operating
conditions. Power MOSFETs and IGBTs compare favorably to bipolar power
transistors on a price/performance basis.
APPLICATIONS
Power semiconductors are used in a broad spectrum of commercial and
industrial applications, including many products with long life cycles. The
Company believes that because of their more gradual rate of technological change
and the diversity of applications, the demand for power semiconductors is less
cyclical than for ICs. Power semiconductor demand is driven by conversion to new
technologies, the proliferation of new end-product applications, and growth in
the end markets. The Company believes that markets driving future demand for
power semiconductors include:
PORTABLE ELECTRONICS. Advances in power semiconductors help extend battery
life and reduce product size and weight in a variety of battery-operated
products such as lap-top and notebook computers, personal digital organizers,
cellular telephones, household appliances, and hand tools.
AUTOMOTIVE ELECTRONIC SYSTEMS. The concentration of solid state electronics
in recent model year automobiles has increased rapidly, as safety and comfort
features increase demands on the battery. Applications include anti-lock braking
systems, air-bags, fuel injection systems, electronic power steering, electric
windows, and adjustable mirrors and seats. Adoption of battery operated electric
vehicles to reduce emissions would dramatically increase consumption of MOS
transistors.
ELECTRONIC LIGHTING BALLASTS. Electronic lighting ballasts, which
incorporate power MOSFETs and Power ICs, significantly reduce the amount of
energy consumed in lighting. Conversion to electronic ballasts has been driven
by lower end-user operating costs and incentives from electric utilities to
encourage energy efficiency.
VARIABLE SPEED MOTORS. Variable-speed solid state controls increase energy
efficiency and performance in a broad range of industrial and appliance motors.
In addition, clean air legislation is driving the conversion from traditional
chlorofluorocarbons ("CFCs") to less toxic refrigerants which are also less
efficient. Manufacturers of refrigerators and air conditioners can compensate
for these less efficient chemicals by using more efficient variable-speed
motors.
PRODUCTS
The Company's products convert electrical power to make it more usable and
efficient in performing work such as operating power supplies, controlling
motors, and lighting lamps. The products'
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ability to minimize energy lost at each point in the power conversion process is
central to their value. Important growth applications include such
energy-sensitive products as electronic fluorescent lights, more energy
efficient refrigeration and air conditioning equipment, and electric vehicles.
The Company's HEXFET power MOSFET products comprised about 68% of fiscal
1996 sales. IR also supplies IGBT transistors, High Voltage Control ICs,
high-performance diodes, and high power rectifiers and thyristors. The Company
believes that this complete line of power conversion products represents a
competitive advantage, enabling IR to provide customers with integrated
solutions to their power conversion needs.
SWITCHING PRODUCTS
MOS TRANSISTORS. MOS transistors (power MOSFETs and IGBTs) serve the switch
function in power conversion to provide an even, usable flow of power for
electronic equipment.
POWER MOSFETS. Through its HEXFET product line, the Company is the world
leader in power MOSFETs. The breadth and diversity of the market for these
products help to stabilize demand.
Applications for MOSFETs in automobiles include anti-lock braking and fuel
injection systems, electronic power steering, power accessories, and air bags.
Computer/peripheral applications include power supplies, disk drives, and
printers. Office equipment applications include copiers and facsimile machines.
Consumer electronics applications include home entertainment, video cameras,
household appliances, and power tools. Lighting applications include electronic
lighting ballasts and compact fluorescent bulbs. Industrial applications include
motor control, instrumentation, and test equipment. Communications applications
include telephone networks and modems. Government and aerospace applications
include commercial and military satellites, communications equipment, command-
and-control systems, and missiles.
Market acceptance and brand recognition of HEXFETs have benefited from the
Company's emphasis on quality control and reliability, and the Company believes
its standards to be among the most stringent in the industry. Cumulative and
current data on long and short term product reliability is made available to
customers quarterly.
The Company fabricates the majority of its power MOSFET wafers at HEXFET
America. Die from these wafers are assembled into packaged devices at HEXFET
America, IR's facilities in England and Mexico, and subcontract facilities in
Asia. See "-- Manufacturing."
IGBTS. IGBTs typically serve the switch function in power conversion
applications that require higher current and voltage than power MOSFETs can
handle efficiently. IGBTs combine the ease of voltage-driven power MOSFET
technology with the conduction efficiency of bipolar transistor technology. The
performance and ruggedness of these devices enable them to replace bipolar
transistors and thyristors in many high-voltage, high-current motor control and
power conditioning applications. Energy-efficient, variable-speed motor controls
are an emerging application, and the Company believes electric vehicles will
require large quantities of IGBTs for each vehicle.
The Company's IGBT technology is closely related to its HEXFET technology,
and the Company views them as complementary products. The Company believes that
its patents on fundamental MOSFET technology also apply to IGBTs, and it is
seeking further patent protection on its IGBT technology.
CONTROL PRODUCTS
HIGH VOLTAGE CONTROL ICS. These devices serve the control function of power
conversion. They perform the functions of several discrete components. This
integration allows IR's customers to simplify circuit design and assembly,
improve reliability and reduce overall system size and cost. In sensing and
responding to adverse operating conditions, High Voltage Control IC performance
is superior to that of discrete components in a safety or diagnostic circuit.
IR's High Voltage Control ICs
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draw on the Company's MOSFET technology and are designed to optimize the
performance of both power MOSFETs and IGBTs. The Company believes that its power
MOSFET patents also apply to a broad range of High Voltage Control ICs.
High Voltage Control ICs are used in a wide variety of power supply, motor,
and lighting control applications. These include industrial motor controls, home
appliance motor controls, solenoid drivers, welding equipment, telecom
switchers, computer/peripherals, instrumentation and test equipment, electronic
lighting ballasts, and compact fluorescent light bulbs.
OUTPUT RECTIFICATION PRODUCTS
The Company's Schottky diodes and Fast-Recovery diodes serve the output
rectification function of power conversion. Output rectification reconfigures
the elements into a form usable by electrically-operated equipment. Schottky
diodes are used with power MOSFETs in high-frequency applications such as
computer/peripherals. The Company's trademarked HEXFRED Fast-Recovery diodes are
used with IGBTs in higher-current, lower-frequency applications such as motor
controls.
INPUT RECTIFICATION PRODUCTS
The Company also manufactures a broad line of rectifiers, diodes and
thyristors that serve the input rectification function of power conversion.
These products condition power to make it more efficient and usable, principally
in industrial end products that require power-handling capability from one amp
to 5000 amps and from 20 volts to 5000 volts. Applications include motor and
lighting controls, welding equipment, fork lifts, machine tools, induction
heating, locomotives, motor-driven production lines, smelting equipment, and
power supplies.
MANUFACTURING
Semiconductor manufacturing involves two phases of production: wafer
fabrication and assembly (or packaging). Wafer fabrication is a sequence of
process steps that expose silicon wafers to chemicals that change their
electrical properties. The chemicals are applied in patterns that define cells
or circuits within numerous individual devices (often termed "die" or "chips")
on each wafer. Packaging or assembly is the sequence of production steps that
divide the wafer into individual chips and enclose the chips in external
structures (termed packages) that make them usable in a circuit. Power
semiconductors generally use the process technology and equipment already proven
in ICs manufacturing.
The Company has production facilities in California, England, Italy, Mexico,
India, and China. In addition, the Company has equipment at, or manufacturing
supply agreements with, subcontractors located in the Philippines, Japan,
Taiwan, Malaysia, and the United States.
IR fabricates the majority of its power MOSFET wafers at HEXFET America in
Temecula, California. In addition, HEXFET America produces IGBT wafers. A wafer
fabrication facility for IGBTs and other MOSFET devices as well as assembly
operations for government and other advanced products, such as High Voltage
Control ICs, are located in El Segundo, California. Facilities that assemble
HEXFETs and other products are located in the United States and overseas, in
Company-owned and subcontract facilities. In Tijuana, Mexico, the Company
assembles MOSFETs, Schottkys, IGBTs, and other modules. The Company's Oxted,
England facility, which qualifies as a duty-free facility, assembles MOSFETs,
IGBTs, Schottkys, and diodes. Currently, the Company manufactures substantially
all its high power rectifiers and thyristors at its Turin, Italy facility. A
Schottky wafer fabrication facility currently under construction at its Turin
facility is scheduled to be in production by the end of calendar 1996. The
Company also has arrangements with third parties for product assembly in the
Philippines, Malaysia, Taiwan, Japan, and Mexico. In a duty-free zone in India,
the Company has an assembly facility for rectifiers and thyristors.
To aggressively address the fastest growing segments of the power transistor
market: high density MOSFETs and IGBTs, the Company installed a second wafer
fabrication unit at HEXFET America. Phase one, completed in September 1995, is
expected to add about $185 million in additional product shipments at full
utilization. Phase two of the expansion, scheduled to be in production in the
second half of fiscal year 1997, is expected to support an additional $150
million in annual revenues at
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an incremental cost of approximately $45 million. Estimated additional annual
revenues from the expansion are based on fiscal year 1996 pricing levels.
Next-generation devices designed for production in the new fabrication unit
incorporate design and process advancements in the Company's proprietary HEXFET
and IGBT technologies. A core process with shared elements for both products
enables the unit to combine flexibility with efficient high-volume manufacturing
techniques. Fabrication is performed on six-inch wafers and uses a
continuous-flow layout similar to the one already in use at HEXFET America.
The Company is transferring its assembly lines from HEXFET America to its
assembly facility in Tijuana, Mexico and to independent subcontractors. The move
affects only the assembly phase of manufacturing and allows the California plant
to focus on expansion of its benchmark wafer fabrication capability and enables
the Company to reduce the cost of assembling its HEXFET-Registered Trademark-
power MOSFET chips into finished devices. Currently, the transfer is
approximately 60% complete. The move is targeted for completion in the second
half of fiscal year 1997.
MARKETING, SALES, AND DISTRIBUTION
The Company markets its products through sales staff, representatives, and
distributors. The Company believes its ability to offer products that serve each
of the four functions of power conversion enhances its competitive position in
the overall power semiconductor market.
In fiscal year 1996, the Company's sales by region were approximately 46%
from North America, 28% from Europe, and 26% from Asia. The Company's domestic
direct sales force is organized in four sales zones. In Western Europe, the
Company's products are sold through its own sales force as well as through sales
agents and distributors. The Company's European sales and representative offices
are in England, Italy, Sweden, France, Germany, Finland, Denmark, Switzerland,
Russia, the Czech Republic, and Hungary. In Asia, IR has sales, representative,
and liaison offices in India, Japan, Singapore, China, Hong Kong, and South
Korea.
Because many applications require products from several product groups, the
Company has organized its marketing efforts by market sector, rather than
product type. These business management groups focus on several key commercial
sectors and on government and aerospace business. In addition, the Company's
staff of application engineers provides customers with technical advice and
support regarding the use of IR's products.
CUSTOMERS
In most cases, the Company's devices are incorporated in larger systems
manufactured by end product manufacturers. The Company's customers in the
automotive segment include Delco, Ford, Siemens, and Bosch. International
Business Machines, Hewlett Packard, and Compaq purchase the Company's products
in the computer segment. Consumer electronics customers include Philips and
Sony. Customers in the telecommunications segment include Lucent Technologies
and Nokia. Approximately 30% of the Company's revenues come from sales of its
products to distributors including Arrow Electronics and Future Electronics. The
Company has historically found it more difficult to determine distributor demand
than demand from its other customers.
BACKLOG
As of June 30, 1996, the Company's backlog of orders was $315.5 million
compared to $210.8 million as of June 30, 1995. Backlog is comprised of purchase
orders and customer forecast commitments scheduled to be shipped within the
following 12 months. Increasingly, major customers are operating their
businesses with shorter lead times and are placing orders on a periodic rather
than an annual basis. In most circumstances IR allows customers to cancel
purchase orders without penalty. Backlog is not necessarily indicative of sales
for any future period.
Subsequent to year-end, the Company noted aggressive efforts by distributors
(which accounted for approximately 30% of the Company's revenues in fiscal 1996)
to reduce inventory levels, including order cancellations and a slow-down in new
order input, which have cut deeply into the Company's backlog. Furthermore,
competitive price moves have resulted in a 10% to 15% decrease in average
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prices on approximately one-third of the Company's business. The Company
anticipates that the inventory correction should be largely completed by the end
of December 1996. In addition, the Company believes the competitive pressure may
result in lower prices on a significant portion of its business.
RESEARCH AND DEVELOPMENT
The Company's breadth of technology and focus on power conversion underlie
an integrated approach to developing complementary products that add value and
differentiate International Rectifier from its competitors. IR conducts research
and development activities to improve the price/ performance ratio of its
product offerings to customers across a wide range of end-use applications.
In fiscal years 1996, 1995, and 1994, the Company spent approximately $27.0
million, $20.1 million, and $16.4 million, respectively, on research and
development activities.
In fiscal 1995, the Company introduced a new generation of
HEXFET-Registered Trademark- brand power MOSFETs that offer benchmark
performance and manufacturing cost reductions designed to create a significant
competitive advantage. The Generation5 HEXFETs are being produced at the
Company's newest wafer fabrication unit in Temecula, California, which also
produces IR's latest generation of IGBT transistors using the same core process.
In fiscal 1996, IR also previewed its most comprehensive offering to date in
the area of "solution" products that combine multiple components and
technologies to benefit customers' overall circuit size, cost, and performance.
These products have been in beta site testing since March 1996 and are scheduled
for market introduction in late calendar 1996.
INTELLECTUAL PROPERTY
The Company has made significant investments in developing and protecting
its intellectual property. Through successful enforcement of its patents, the
Company has entered into a number of license agreements, generated royalty
income and received substantial payments in settlement of litigation. The
Company currently has 80 unexpired U.S. patents and 47 U.S. patents pending.
Those patents fundamental to the Company's products expire between 2000 and
2010. In addition, the Company has 61 foreign patents and 154 foreign patents
pending in a number of countries. The Company is also licensed to use certain
patents owned by others. Under the terms of an agreement with Unitrode
Corporation that terminates in March 2000, the Company pays Unitrode
approximately 12% of the Company's net patent royalty income. The Company has
several registered trademarks in the United States and abroad including
trademarks for HEXFET. The Company believes that its proprietary technology and
intellectual property contribute to its competitive advantage.
Since the Company believes that its power MOSFET patents are broadly
applicable, it is committed to enforcing its rights under those patents and is
pursuing additional license agreements. The Company presently has license
agreements with 18 companies: ABB Semiconductor, Inc.; CP Clare Corporation;
Harris Corporation; Hitachi, Ltd.; Matsushita Electronics Corporation;
Mitsubishi Electric Corporation; Motorola, Inc.; National Semiconductor
Corporation; NEC Corporation; Nihon Inter Electronics Corporation; Philips
Electronics, N.V.; Sanken Electric Company, Ltd.; Sanyo Electric Company;
SGS-Thomson Microelectronics, Inc.; Siemens Aktiengesellschaft; Siliconix
incorporated; Toshiba Corporation; and Unitrode Corporation. In fiscal 1996,
$16,262,000 of revenues were derived from royalty-bearing license agreements.
Certain of the Company's fundamental power MOSFET patents have been
subjected, and continue to be subjected, to reexamination in the United States
Patent and Trademark Office ("PTO"). The patents subject to reexamination are
fundamental to the Company's MOS transistors and their loss would allow
competitors to use currently patented features of the Company's MOS transistor
technology without liability for infringement of those patents. On the following
dates, the PTO granted requests for reexamination of the following patents of
the Company: November 13, 1992 and September 12, 1994 on patent 4,642,666;
October 13, 1993 on patent 4,705,759; September 12, 1994 on patent 4,959,699;
September 23, 1994 and June 28, 1995 on patent 5,008,725; January 17, 1995 on
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patent 5,130,767; June 5, 1995 on patent 5,191,396; and June 14, 1995 on patent
4,593,302. On February 14, 1995 and on December 26, 1995, respectively, the PTO
issued reexamination certificates, confirming the patentability of the Company's
U.S. patents 4,705,759 and 5,191,396.
Although no assurance can be given as to the ultimate outcome of the
Company's patent enforcement efforts, the PTO reexamination proceedings, or the
success of the Company's patent licensing program, the Company believes that its
patent portfolio will be the source of continuing royalty income.
COMPETITION
The Company encounters differing degrees of competition for its various
products, depending upon the nature of the product and the particular market
served. Generally, the semiconductor industry is highly competitive and subject
to rapid price changes, and many of the Company's competitors are larger
companies with greater financial resources than IR. The Company believes that
its breadth of product line and its ability to combine products that serve the
different functions into one package distinguish it from its competitors. IR's
products compete with products manufactured by others based on breadth of
product line, quality, price, reliability, over-all performance of the products,
delivery time to the customer, and service (including technical advice and
support). The Company's competitors include Eupec, Harris Corporation, Hitachi
Ltd., Motorola, Inc., NEC Corporation, Philips International B.V., Powerex,
Inc., Samsung Semiconductor Inc., SGS-Thomson Microelectronics, Siemens AG,
Siliconix incorporated, Toshiba Corporation, and Westcode Semiconductors Ltd.
ENVIRONMENTAL MATTERS
Federal, state, and local laws and regulations impose various restrictions
and controls on the discharge of certain materials, chemicals, and gases used in
semiconductor processing. The Company does not believe that compliance with such
laws and regulations will have a material adverse effect on its financial
position.
The Company and Rachelle Laboratories, Inc. ("Rachelle"), its former
pharmaceutical subsidiary which discontinued operations in 1986, have been named
among several hundred entities as potentially responsible parties ("PRPs") under
the provisions of the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("CERCLA"), in connection with the United States
Environmental Protection Agency's ("EPA") investigation of the disposal of
allegedly hazardous substances at a major superfund site in Monterey Park,
California (the "OII Site"). Certain PRPs who settled certain claims with the
EPA under consent decrees filed suit in Federal Court in May 1992 against a
number of other PRPs, including the Company, for cost recovery and contribution
under CERCLA. The lawsuit against the Company, relating to the first and second
consent decrees, was settled in August 1993 for the sum of $40,000 to avoid
protracted and expensive litigation. In June 1995, the Company was named among
others as a party defendant in Federal Court apparently in connection with a
third consent decree with respect to the OII Site. The Company received a letter
(dated July 25, 1995) from the U.S. Department of Justice offering to settle
claims against Rachelle relating to the first three elements of clean-up work at
the OII Site for the sum of $4,953,148 (the final remedy assessment has not yet
been made). This settlement offer expired by its terms on September 1, 1995. The
Company also received a separate letter from the EPA dated July 25, 1995, with
respect to International Rectifier only, notifying the Company that it may
qualify for a settlement with de minimis generators under CERCLA Section 122(g).
The Company has received no further communications in this regard. At an August
17, 1995 meeting with EPA representatives and representatives of other PRPs, EPA
representatives stated that they will not have an estimate of the cost of final
clean-up until at least early 1996. The Company is unaware of any estimate of
the cost of final clean-up of the site.
On August 7, 1995, the Company received a Supplemental Information Request
from the EPA, directed to Rachelle. In its response, dated October 20, 1995, the
Company explained that none of the wastes generated by Rachelle were hazardous.
The Company has received no further communications in connection with the
Supplemental Information Request.
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Claims have been made with the Company's insurers with respect to the OII
site matter; however, there can be no assurance that the insurance coverage
attaches to these claims. The Company does not believe that either it or
Rachelle is responsible for the disposal at the OII site of any material
constituting hazardous substances under CERCLA. Although the ultimate resolution
of this matter is unknown, the Company believes that it will not have a material
adverse impact on its financial position.
In May 1993, the Company purchased property from its Employee Profit Sharing
and Retirement Plan. It was determined that the property required clean-up of
seepage from a storage tank, at an estimated additional cost of $525,000. The
Company commenced the clean-up in fiscal year 1994, and through June 30, 1996
approximately $518,000 in clean-up costs have been incurred which will be
capitalized as additional costs of the property.
On July 18, 1994, the Company received a letter from the State of Washington
Department of Ecology (the "Department") notifying the Company of a proposed
finding that the Company is a potentially liable person ("PLP") for alleged PCE
contamination (also known as perchloroethylene, tetrachloroethylene, and other
names) of real property and groundwater in Yakima County, Washington. The letter
alleges that the Company arranged for disposal or treatment of the PCE or
arranged with a transporter for the disposal or treatment of the PCE in Yakima
County. The Company replied by a letter dated August 11, 1994, stating that it
has not contributed to PCE or other solvent contamination at the Yakima County
site (resulting from sending carbon canisters for regeneration to a facility in
the county) and that it should not be designated a PLP. On October 11, 1994, the
Company received a letter from the Department notifying the Company of its
finding that the Company is a PLP in the above matter. On June 20, 1996, the
Company received a letter from the Washington Department of Ecology, stating
that a settlement offer would be extended to all potentially liable persons in
late summer or early fall of 1996. While the letter did not commit to the amount
of any settlement, it predicted a settlement of approximately $4.95 for each
pound of carbon sent to Cameron-Yakima.
The Company received a letter dated September 9, 1994, from the State of
California Department of Toxic Substances Control stating that the Company may
be a PRP for the deposit of hazardous substances at a facility in Whittier,
California. The Company, in June 1995, agreed to join a group of other PRPs to
remove contamination from the site. The group currently estimates the total cost
of the clean-up to be between $3.1 million and $4 million, of which between
$12,000 and $15,000 is presently expected to be allocated to the Company.
However, the ultimate cost borne by the Company will depend on the extent of the
clean-up undertaken by the group and the actual clean-up costs and the final
allocation scheme agreed upon by the group.
EMPLOYEES
As of June 30, 1996, the Company employed approximately 3,915 people, of
whom approximately 2,775 are employed in North America, 1,065 in Western Europe,
and 75 in Asia. The Company is not a party to any collective bargaining
agreements. The Company considers its relations with its employees to be good.
ITEM 2. PROPERTIES
The Company's operations occupy a total of approximately 1,035,000 square
feet, of which approximately 564,000 square feet are located within the United
States. Of the worldwide total, approximately 346,000 square feet are leased and
the balance is owned by the Company.
IR's leases expire between 1996 and 2012. If the Company is unable to renew
these leases upon expiration, it believes that it could find other suitable
premises without any material adverse impact on its operations.
8
The Company's major facilities are in the following locations:
TOTAL SQUARE FEET
---------------------
FACILITY OWNED LEASED EXPIRATION OF LEASE
- ----------------------------------- --------- --------- ----------------------------------------
Temecula, California............... 297,000 --
El Segundo, California............. 93,000 164,000 September 30, 1996 -- July 31, 2004
Tijuana, Mexico.................... 149,000 100,000 February 28, 1997(1)
Oxted, England..................... 40,000 31,000 June 30, 2000 -- March 27, 2012
Turin, Italy....................... 110,000 9,000 September 30, 2001
- ------------------------
(1) In May 1995 the Company purchased land in Tijuana, Mexico to construct a new
assembly facility. At June 30, 1996, the building was substantially
complete. The move from the leased facilities is scheduled for August 1996
through February 1997.
The Company believes that these facilities are adequate for its current and
anticipated near term operating needs. IR estimates that it currently utilizes
approximately 80% of its worldwide manufacturing capacity.
The Company has sales and technical support offices located throughout the
United States, Canada, France, Germany, Finland, Scandinavia, Russia, Czech
Republic, Hungary, Hong Kong, Japan, China, Korea, Singapore, and India which
operate in leased facilities.
ITEM 3. LEGAL PROCEEDINGS
The Company and SGS-Thomson Microelectronics, Inc. ("SGS") are engaged in
various legal proceedings relating to their respective power MOSFET patents. SGS
filed suit against the Company in June 1991 in Federal District Court in Texas,
charging infringement of U.S. patent 4,553,314. On motion by the Company, the
suit was transferred to the Federal District Court in Los Angeles, California,
and thereafter SGS amended its complaint to charge infringement of U.S. patents
4,495,513 and 4,712,127. SGS alleges, in substance, that the Company's power
MOSFET, power IC and IGBT products infringe the '314 patent, that the Company's
IGBT products infringe the '513 patent, and that certain packages for the
Company's products (including certain power MOSFET packages) infringe the '127
patent. The complaint, as amended, seeks unspecified actual damages (but no less
than an unspecified reasonable royalty) and an injunction restraining further
sales of such products. On February 1, 1993, the District Court dismissed SGS's
claims for infringement of the '127 and '513 patents for lack of standing and on
March 15, 1993, ruled that the SGS '314 patent is unenforceable due to
inequitable conduct. SGS appealed these rulings, as well as the order
transferring the case to California, to the Court of Appeals for the Federal
Circuit. The Company cross-appealed a separate ruling by the District Court
denying the Company's motion for summary judgment that the '314 patent is
invalid. In July 1994, the Federal Circuit vacated the District Court's grants
of summary judgment as to the '513, '127, and '314 patents and affirmed the
District Court's denial of the Company's motion for summary judgment of
invalidity of the '314 patent. The Federal Circuit ordered, however, that the
case should proceed in California. On July 5, 1995, the Court, based on the
stipulation of the parties, effectively stayed SGS's claims on its '314 and '127
patents pending the outcome of reexamination of the patentability of the subject
matter of those patents by the PTO. These reexamination proceedings are still
pending.
In November and December 1995, the parties presented testimony and evidence
to the District Court concerning the interpretation of the claims of the '513
patent; the Court has not yet ruled on the matter.
The Company has also filed a separate action in the same District Court
against SGS and its Italian affiliate, SGS-Thomson Microelectronics, S.r.l.,
seeking an injunction against infringement of the Company's U.S. patents
5,008,725 and 5,130,767. This action has been essentially stayed pending
completion of reexamination of these patents by the PTO (see "Intellectual
Property").
9
The Company filed another separate action in the same District Court on
August 13, 1996, against the same SGS entities charging infringement of its U.S.
patent 5,545,955.
In the Fall of 1995, SGS and SGS-Thomson Microelectronics, S.A.
("SGS-France") commenced an infringement action in Great Britain against the
Company and International Rectifier (Great Britain) Limited ("IRGB") based on
the European counterpart patent to the '513 patent (European Patent (UK) No.
0,068,546). The Company and IRGB have filed a response denying the material
allegations plead by SGS and SGS-France and seek revocation of the foreign
counterpart patents at issue. The British action is set for trial in July 1997.
The Company, its directors, and certain officers have been named as
defendants in three class action lawsuits filed in Federal Court in California.
These suits seek unspecified but substantial compensatory and punitive damages
for alleged intentional and negligent misrepresentations and violations of the
federal securities laws. The complaints generally allege that the Company and
the other defendants made materially false statements or omitted to state
material facts in connection with the public offering of the Company's common
stock completed in April 1991 and the redemption and conversion in June 1991 of
the Company's 9% Convertible Subordinated Debentures Due 2010. They also allege
that the Company's projections for growth in fiscal 1992 were materially
misleading. Although the Company believes that the claims alleged in the suits
are without merit, the ultimate outcome cannot be presently determined. A
substantial judgment or settlement, if any, could have a material adverse effect
on the Company's financial condition and results of operations. Two of these
suits also name Kidder, Peabody & Co. Incorporated and Montgomery Securities as
defendants. Defendants Kidder, Peabody & Co. and Montgomery Securities have
demanded that the Company indemnify them for any liability or expenses,
including attorneys fees, that they may incur in connection with this
litigation. Those defendant underwriters base that demand on their underwriting
agreements with the Company. The Company has agreed to advance the underwriter
defendants' attorneys fees pursuant to that indemnity, subject to a reservation
of the Company's right to seek reimbursement of those advances.
No provision for any liability that may result upon adjudication of these
matters has been made in the consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
Not applicable.
ADDITIONAL ITEM. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of IR are:
Eric Lidow 83 Chairman of the Board
Alexander Lidow 41 Chief Executive Officer; Director
Derek B. Lidow 43 Chief Executive Officer; Director
Robert J. Mueller 67 Executive Vice President -- External Affairs
and Business Development; Director
Michael P. McGee 37 Vice President -- Chief Financial Officer
George Krsek 75 Director
Jack O. Vance 71 Director
Rochus E. Vogt 66 Director
Donald S. Burns 71 Director
James D. Plummer 51 Director
10
Eric Lidow is a founder of the Company, has been a director of the Company
since its inception in 1947 and was Chief Executive Officer until March 6, 1995.
Mr. Lidow continues as Chairman of the Board and also serves as Chairman of the
Company's Executive Committee.
Alexander Lidow, Ph.D., has been employed by the Company since 1977. He
served as the Semiconductor Division's Vice President -- Research and
Development since July 1979, was promoted to Semiconductor Division Executive
Vice President -- Manufacturing and Technology in March 1985, and became the
President of the Electronic Products Division in July 1989. In August 1992, Dr.
Lidow was elected Executive Vice President of Operations. He was elected a
director in September 1994 and Chief Executive Officer in March 1995. Dr. Lidow
is a son of Eric Lidow.
Derek B. Lidow, Ph.D., has been employed by the Company since 1976. He
served as the Semiconductor Division's Vice President -- Operations since March
1980, was promoted to Semiconductor Division Executive Vice President --
Marketing and Administration in March 1985, and became President of the Power
Products Division in July 1989. In August 1992, Dr. Lidow was elected Executive
Vice President and in July 1993 assumed responsibilities for worldwide sales and
marketing. He was elected a director in September 1994 and Chief Executive
Officer in March 1995. Dr. Lidow is a son of Eric Lidow.
Robert J. Mueller has been employed by the Company since November 1961. He
served as Vice President of Marketing for the U.S. Semiconductor Division from
1963 until October 1969 when he was promoted to Corporate Vice President --
Foreign Operations. Mr. Mueller became Executive Vice President -- World
Marketing and Foreign Operations in April 1978, Corporate Executive Vice
President -- External Affairs and Worldwide Sales in July 1989, and in July 1993
became Executive Vice President -- External Affairs and Business Development. He
was elected a director in 1990.
Michael P. McGee has been employed by the Company since 1990. He joined the
Company in July 1990 as Director of Corporate Accounting and was promoted to
Corporate Controller in December 1990. Mr. McGee became Vice President,
Controller and Principal Accounting Officer in 1991, and in 1993, became Vice
President -- Chief Financial Officer. From 1985 to the time he joined the
Company, Mr. McGee was a senior manager and audit manager at Ernst and Young.
George Krsek, Ph.D., was President of Houba, Inc. a pharmaceutical firm from
1975 to July 1994, and is currently President of Konec L.L.C., a management
consulting company. He has been a director of the Company since 1979, and serves
as Chairman of the Company's Audit Committee.
Jack O. Vance became the Managing Director of Management Research, a
management consulting firm, in November 1990. From 1960 through 1989 he was a
director of McKinsey & Co., Inc., a management consulting firm. During the years
1973 through 1989 he was also the Managing Director of the firm's Los Angeles
office. He has been a director of the Company since 1988 and also serves as
Chairman of the Company's Compensation and Stock Option Committee. He is also a
director of Vencor Corporation (formerly Hillhaven Corporation), International
Technology Corporation, Escorp, The Olson Company, University Restaurant Group,
FCG Enterprises, Inc., and Semtech Corporation.
Rochus E. Vogt, Ph.D., is the R. Stanton Avery Distinguished Service
Professor and a Professor of Physics, California Institute of Technology, and
acted as Provost from 1983 through 1987. He has been a director of the Company
since 1984.
Donald S. Burns has been Chairman, President and Chief Executive Officer of
Prestige Holdings, Ltd., a property management and business consulting firm,
since 1978. Mr. Burns was elected a director of the Company in 1993. He is also
a director of ESI Corporation and International Technology Corporation.
James D. Plummer, Ph.D., has been the John M. Fluke Professor of Electrical
Engineering, Stanford University, since 1988 and Director of Stanford's
Integrated Circuits Laboratory since 1984. Dr. Plummer was elected a director of
the Company in September 1994.
11
PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDERS'
MATTERS
PRICE RANGE OF COMMON STOCK
(IN DOLLARS)
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------------ ------------------ ------------------ ------------------ STOCKHOLDERS AT
FISCAL YEAR HIGH LOW HIGH LOW HIGH LOW HIGH LOW YEAR END
- -------------------- ------- ------- ------- ------- ------- ------- ------- ------- ---------------
1996................ 22 16 1/8 25 3/4 19 1/16 24 1/4 16 3/4 26 16 1/8 1,742
1995................ 11 1/8 7 9/16 12 1/8 9 5/8 13 1/8 11 5/16 16 11/16 11 5/8 1,771
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol "IRF." Market prices have been retroactively restated to reflect the
two-for-one stock split declared on November 20, 1995.
No dividends have been recently declared or paid. The Company does not
intend to pay cash dividends in the foreseeable future as all funds will be used
to expand operations. Furthermore, under certain credit agreements, the Company
is not permitted to pay any cash dividends.
12
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data as of June 30, 1996 and 1995 and
for the fiscal years ended June 30, 1996, 1995, and 1994 are derived from the
audited consolidated financial statements of the Company and should be read in
conjunction with the audited consolidated financial statements and notes with
respect thereto included herein. The selected consolidated financial data as of
June 30, 1994, 1993, and 1992, and for the fiscal years ended June 30, 1993 and
1992 are derived from audited consolidated financial statements of the Company
which are not included herein.
FISCAL YEARS ENDED JUNE 30,
---------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
STATEMENT OF OPERATIONS DATA
(IN THOUSANDS EXCEPT PER SHARE DATA) (1)
Revenues........................................ $ 576,849 $ 429,026 $ 328,882 $ 281,732 $ 265,495
Cost of sales................................... 351,046 278,202 219,944 202,684 186,437
----------- ----------- ----------- ----------- -----------
Gross profit.................................... 225,803 150,824 108,938 79,048 79,058
Selling and administrative expense.............. 102,129 82,328 69,008 62,637 58,771
Research and development expense................ 26,967 20,108 16,381 14,083 9,405
----------- ----------- ----------- ----------- -----------
Operating profit................................ 96,707 48,388 23,549 2,328 10,882
Interest expense, net........................... (394) (377) (3,625) (2,250) (1,436)
Other income (expense), net..................... (383) (544) (1,050) (2,675) 1,066
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes............... 95,930 47,467 18,874 (2,597) 10,512
Provision for income taxes...................... 29,451 8,069 3,160 436 1,275
----------- ----------- ----------- ----------- -----------
Net income (loss)............................... $ 66,479 $ 39,398 $ 15,714 $ (3,033) $ 9,237
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net income (loss) per share (2)................. $ 1.29 $ 0.84 $ 0.38 $ (0.08) $ 0.23
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Average common and common equivalent shares
outstanding (2)................................ 51,384 47,020 40,856 40,174 40,214
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
AT JUNE 30,
---------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
BALANCE SHEET DATA (IN THOUSANDS)
Working capital................................. $ 151,809 $ 127,751 $ 67,165 $ 58,116 $ 67,538
Total assets.................................... 629,079 496,184 330,574 278,448 285,880
Short-term debt................................. 23,570 25,235 33,310 27,539 27,135
Long-term debt, less current maturities......... 47,994 23,881 26,817 11,810 11,535
Stockholders' equity............................ 421,213 345,181 202,943 186,074 191,703
- ------------------------
(1) Certain reclassifications have been made to previously reported amounts to
conform with current year presentation.
(2) Adjusted to reflect the two-for-one stock split declared on November 20,
1995.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain items included in selected financial
data as a percentage of revenues.
FISCAL YEARS ENDED
JUNE 30,
-------------------------------
1996 1995 1994
--------- --------- ---------
Revenues......................................................... 100.0% 100.0% 100.0%
Cost of sales.................................................... 60.9 64.8 66.9
--------- --------- ---------
Gross profit..................................................... 39.1 35.2 33.1
Selling and administrative expense............................... 17.7 19.2 21.0
Research and development expense................................. 4.7 4.7 5.0
--------- --------- ---------
Operating profit................................................. 16.7 11.3 7.1
Interest expense, net............................................ (0.1) (0.1) (1.1)
Other expense, net............................................... (0.1) (0.1) (0.3)
--------- --------- ---------
Income before income taxes....................................... 16.5 11.1 5.7
Provision for income taxes....................................... 5.0 1.9 0.9
--------- --------- ---------
Net income....................................................... 11.5% 9.2% 4.8%
--------- --------- ---------
--------- --------- ---------
1996 COMPARED WITH 1995
Revenues for fiscal 1996 increased 34.5% to $576.8 million from $429.0
million in the prior year. The Company's revenue increase reflected continued
growing demand for the Company's power MOSFET and related devices which resulted
in a 39% increase in revenues from these products. Revenues from the thyristor
and rectifier product lines increased 6% from the prior period. Changes in
foreign exchange rates negatively impacted revenues by approximately $3.8
million. Revenues for fiscal 1996 also included $16.3 million of net patent
royalties compared to $9.7 million in the prior period.
Gross profit was 39.1% of revenues ($225.8 million) in fiscal 1996 versus
35.2% of revenues ($150.8 million) in fiscal 1995. The increased margin
reflected greater manufacturing volume and efficiencies and a greater
contribution from new higher margin products.
In fiscal 1996, selling and administrative expense was 17.7% of revenues
($102.1 million) versus 19.2% of revenues ($82.3 million) in fiscal 1995. The
planned increase in absolute dollars was made to support the Company's 34.5%
revenue growth and consisted mainly of costs related to additional staffing,
higher commission expense, and increased advertising expense.
In fiscal 1996, the Company's research and development expenditures
increased $6.9 million to $27.0 million (4.7% of revenues) from $20.1 million
(4.7% of revenues) in the prior period. Research and development activities were
focused on the advancement and diversification of the HEXFET product line and
expansion of the related IGBT products, the development of High Voltage Control
ICs and complementary components that work in combination with HEXFETs and IGBTs
to improve system performance.
Net interest expense and net other expense were essentially unchanged in
fiscal 1996 from fiscal 1995.
1995 COMPARED WITH 1994
Revenues for fiscal 1995 increased 30.4% to $429.0 million from $328.9
million in the prior year. The Company's revenue increase reflected continued
growing demand for the Company's power MOSFET and related devices which resulted
in a 34% increase in revenues from these products. Revenues from the thyristor
and rectifier product lines increased 17% from the prior period. Changes
14
in foreign exchange rates positively impacted revenues by approximately $11.1
million. Revenues for fiscal 1995 also included $9.7 million of net patent
royalties compared to $9.0 million in the prior period.
Gross profit was 35.2% of revenues ($150.8 million) in fiscal 1995 versus
33.1% of revenues ($108.9 million) in fiscal 1994. The increased margin
reflected greater manufacturing volume and efficiencies and a greater
contribution from new higher margin products.
In fiscal 1995, selling and administrative expense was 19.2% of revenues
($82.3 million) versus 21.0% of revenues ($69.0 million) in fiscal 1994. The
decreased percentage reflects the Company's continued commitment to reducing
operating expenses as a percentage of revenues.
In fiscal 1995, the Company's research and development expenditures
increased $3.7 million to $20.1 million (4.7% of revenues) from $16.4 million
(5.0% of revenues) in the prior period. The Company's research and development
program was focused on the advancement and diversification of the HEXFET product
line and expansion of the related IGBT products, the development of High Voltage
Control ICs and power products that work in combination with HEXFETs and IGBTs
to improve system performance.
The major components of other expense include a $1.0 million charge for the
transfer of assembly operations to the Company's Mexican subsidiary, $0.3
million of severance costs, $0.3 million on the disposal of property, plant and
equipment, $0.3 million of local taxes and $0.5 million in legal fees, offset by
$0.3 million in foreign currency transaction gains and $1.8 million of net
patent royalty revenues related to prior years.
In fiscal 1995, net interest expense decreased by $3.2 million from the
prior year. The decrease was due to approximately $2.4 million in interest
income earned in the current year on funds received from a November 1994
offering of the Company's common stock and an increase of $1.7 million of
interest capitalized in the current year, partially offset by increased interest
expense in the first half of the year on higher average debt balances over the
prior year.
SEASONALITY
The Company has experienced moderate seasonality in its business in recent
years. On average over the past three years, the Company has reported
approximately 46% of annual revenues in the first half and 54% in the second
half of its fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company maintained cash and cash equivalent balances
of $35.8 million and $18.0 million of short-term investments. Cash in excess of
operating requirements is maintained in the United States. In addition, the
Company had established $71.0 million of domestic and foreign revolving lines of
credit, against which $13.3 million had been borrowed. Based on covenant and
collateral limitations, the Company had an additional $49.5 million available
for borrowing against these lines at June 30, 1996. The Company also had
available $65.0 million of bank term loan facilities and $22.5 million of credit
lines for capital equipment. At June 30, 1996, the Company had made purchase
commitments for capital equipment of approximately $42.9 million.
During fiscal 1997, the Company plans to spend approximately $120 million on
capital expenditures for the continuing expansion of its global wafer
fabrication and assembly capacity. The Company intends to fund these capital
expenditures and working capital requirements through cash and cash equivalents
on hand, anticipated cash flow from operations, and as needed, from funds
available from revolving credit, term loan and equipment financing facilities.
The Company may also consider the use of funds from other external sources
including, but not limited to, public or private offerings of debt or equity.
The Company believes that its existing manufacturing capacity is adequate to
respond to anticipated increases in customer requirements and that planned
capital expenditures of $120 million in fiscal 1997 are consistent with the
Company's view of market needs over the next couple of years.
15
Although the Company believes that the class action lawsuits brought against
the Company and its Board of Directors (see "Legal Proceedings") are without
merit, the ultimate outcome thereof cannot be presently determined. Accordingly,
the Company has not made any provision for any liability, if any, that may
result upon adjudication of these matters. For the possible effects of
environmental matters on liquidity, see "Business -- Environmental Matters."
FOREIGN CURRENCY TRANSACTIONS
Due to the global nature of its operations, the Company is subject to the
effect of international currency fluctuations. In fiscal year 1996, over 50% of
the Company's revenues were derived from sales in foreign markets. In the years
ended June 30, 1996, 1995, and 1994, the Company recognized net foreign currency
transaction gains of $126,000, $347,000, and $376,000, respectively.
The Company manages potential foreign currency exposure by entering into
forward contracts and currency options. These contracts are not speculative in
nature, as the resulting gains or losses will offset any losses or gains on the
underlying hedged transactions.
INCOME TAXES
Reflecting benefits derived from the utilization of state and foreign tax
credits and a foreign sales corporation, the Company's effective tax rate in
fiscal 1996 was approximately 30.7%. Partially offsetting these benefits was the
effect of higher statutory tax rates in certain foreign jurisdictions. The
difference between the U.S. federal statutory tax rate of 35% and the Company's
effective tax rates of approximately 17.0% and 16.7% in fiscal years 1995 and
1994, respectively, was attributable mainly to the utilization of U.S. federal
income tax net operating loss carryovers, which were fully utilized in fiscal
1995.
SHAREHOLDER RIGHTS PLAN
On August 2, 1996, the Company's Board of Directors adopted a Shareholder
Rights Plan (the "Plan") under which preferred stock purchase rights (the
"Rights") will be granted for each outstanding share of the Company's common
stock held at the close of business on August 14, 1996. The Plan is intended to
ensure fair and equitable treatment for all shareholders in the event of
unsolicited attempts to acquire the Company.
The Rights will become exercisable ten days after a person or group (the
"Acquiror") has acquired beneficial ownership of 20% or more of the Company's
common stock other than pursuant to a qualified offer, or announces or commences
a tender offer or exchange offer that could result in the acquisition of
beneficial ownership of 20% or more. Once exercisable, each Right entitles the
holder to purchase one one-thousandth of a share of a new series of preferred
stock at an exercise price of $135, subject to adjustment to prevent dilution.
If the Acquiror acquires 20% or more of the Company's common stock, each Right
(except those held by the Acquiror) entitles the holder to purchase either the
Company's stock or stock in the merged entity at half of market value. The
Rights have no voting power, expire on August 14, 2006, and may be redeemed at a
price of $0.01 per Right up to and including the tenth business day after a
public announcement that 20% or more of the Company's shares have been acquired
by the Acquiror.
For additional information, refer to the Company's reports to the Securities
and Exchange Commission on Forms 8-K and 8-A filed on August 20, 1996 and August
21, 1996, respectively.
CURRENT MARKET CONDITIONS
Subsequent to year-end, the Company noted aggressive efforts by distributors
(which accounted for approximately 30% of the Company's revenues in fiscal 1996)
to reduce inventory levels, including order cancellations and a slow-down in new
order input, which have cut deeply into the Company's backlog. Furthermore,
competitive price moves have resulted in a 10% to 15% decrease in average prices
on approximately one-third of the Company's business. Due to the inventory
correction and price pressures, the Company expects revenues in the first
quarter of fiscal 1997 of between $115 million to $125 million. The reduced
level of shipments will result in a lower gross margin percentage and a higher
level of operating expenses as a percentage of revenues. The Company anticipates
that
16
the inventory correction should be largely completed by the end of December
1996. In addition, the Company believes the competitive pressure may result in
lower prices on a significant portion of its business.
The Company is deferring non-critical hiring and expenditures until a
decisive improvement in business conditions is seen.
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Form 10-K Report contains statements which are not historical facts but
are forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995 and that can be identified by the use of
forward-looking terminology such as "anticipate," "believe," "estimate,"
"expect," "may," "should," "view," or "will" or the negative or other variations
thereof. Such forward-looking statements are subject to risks and uncertainties
which could cause actual results to differ materially from those projected.
Financial results are to a large extent dependent on the power MOSFET segment of
the power semiconductor industry. If market demand does not continue to grow,
revenue growth may be impacted, capacity installed might be under-utilized,
capital spending may be slowed, and Company performance may be negatively
impacted. Other risks and uncertainties which could negatively impact Company
results include: risk of nonpayment of accounts receivable; risk of inventory
obsolescence due to shifts in market demand; push-out of delivery dates and
product returns; acceptance of new products and price pressures; market
acceptance of rival products; risks associated with foreign operations and
foreign currency fluctuations; litigation involving intellectual property;
environmental matters; shareholder lawsuits; and business and general economic
conditions in major markets around the world.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
PAGE
----
Report of Independent Accountants......................................... 18
Financial Statements
Consolidated Statement of Operations for the Fiscal Years Ended June 30,
1996, 1995, and 1994................................................... 19
Consolidated Balance Sheet as of June 30, 1996 and 1995................. 20
Consolidated Statement of Stockholders' Equity for the Fiscal Years
Ended June 30, 1996, 1995, and 1994.................................... 21
Consolidated Statement of Cash Flows for the Fiscal Years Ended June 30,
1996, 1995, and 1994................................................... 22
Notes to Consolidated Financial Statements.............................. 23
Supporting Financial Statement Schedule:
SCHEDULE NO. PAGE
- ------------ ----
II Valuation and Qualifying Accounts and Reserves for the
Fiscal Years Ended June 30, 1996, 1995, and 1994........... F-1
Schedules other than those listed above have been omitted since they are
either not required, are not applicable, or the required information is shown in
the consolidated financial statements or related notes.
17
REPORT OF INDEPENDENT ACCOUNTANTS
The Stockholders and Board of Directors
International Rectifier Corporation
We have audited the accompanying consolidated financial statements and the
financial statement schedule of International Rectifier Corporation and
Subsidiaries as of June 30, 1996 and 1995, and for the fiscal years ended June
30, 1996, 1995, and 1994 as listed on the index on page 17 of this Form 10-K.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of International
Rectifier Corporation and Subsidiaries at June 30, 1996 and 1995, and the
consolidated results of their operations and their cash flows for the fiscal
years ended June 30, 1996, 1995, and 1994, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
July 18, 1996
18
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN 000'S EXCEPT PER SHARE AMOUNTS)
FISCAL YEARS ENDED JUNE 30,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
Revenues................................................................... $ 576,849 $ 429,026 $ 328,882
Cost of sales.............................................................. 351,046 278,202 219,944
----------- ----------- -----------
Gross profit............................................................. 225,803 150,824 108,938
Selling and administrative expense......................................... 102,129 82,328 69,008
Research and development expense........................................... 26,967 20,108 16,381
----------- ----------- -----------
Operating profit......................................................... 96,707 48,388 23,549
Other income (expense):
Interest, net............................................................ (394) (377) (3,625)
Other, net............................................................... (383) (544) (1,050)
----------- ----------- -----------
Income before income taxes................................................. 95,930 47,467 18,874
Provision for income taxes (Note 5)........................................ 29,451 8,069 3,160
----------- ----------- -----------
Net income................................................................. $ 66,479 $ 39,398 $ 15,714
----------- ----------- -----------
----------- ----------- -----------
Net income per share (Note 1).............................................. $ 1.29 $ 0.84 $ 0.38
----------- ----------- -----------
----------- ----------- -----------
Average common and common equivalent shares outstanding (Note 1)........... 51,384 47,020 40,856
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part of this statement.
19
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN 000'S EXCEPT SHARE AMOUNTS)
ASSETS
JUNE 30, JUNE 30,
1996 1995
----------- -----------
Current assets:
Cash and cash equivalents............................................................. $ 35,760 $ 50,820
Short-term investments................................................................ 18,000 3,000
Trade accounts receivable, less allowance for doubtful accounts ($1,014 in 1996 and
$901 in 1995)........................................................................ 126,341 94,095
Inventories........................................................................... 82,852 73,155
Deferred income taxes (Note 5)........................................................ 9,801 10,630
Prepaid expenses...................................................................... 3,772 2,112
----------- -----------
Total current assets................................................................ 276,526 233,812
Property, plant, and equipment, at cost, less accumulated depreciation ($160,167 in 1996
and $130,480 in 1995).................................................................. 327,978 245,218
Other assets............................................................................ 24,575 17,154
----------- -----------
Total assets........................................................................ $ 629,079 $ 496,184
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank loans (Note 2)................................................................... $ 13,302 $ 17,250
Long-term debt, due within one year (Note 2).......................................... 10,268 7,985
Accounts payable...................................................................... 67,908 53,771
Accrued salaries, wages, and commissions.............................................. 13,953 11,517
Other accrued expenses................................................................ 19,286 15,538
----------- -----------
Total current liabilities........................................................... 124,717 106,061
Long-term debt, less current maturities (Note 2)........................................ 47,994 23,881
Other long-term liabilities............................................................. 15,999 10,986
Deferred income taxes (Note 5).......................................................... 19,156 10,075
Commitments and contingencies (Notes 7, 8, 9, 10, and 11)
Stockholders' equity (Notes 1 and 3):
Common shares, $1 par value, authorized: 60,000,000; issued and outstanding:
50,821,277 shares in 1996 and 50,360,018 shares in 1995.............................. 50,821 50,360
Preferred shares, $1 par value, authorized: 1,000,000; issued and outstanding: none in
1996 and 1995........................................................................ -- --
Capital contributed in excess of par value of shares.................................. 249,388 240,146
Retained earnings..................................................................... 125,377 58,898
Cumulative translation adjustments.................................................... (4,373) (4,223)
----------- -----------
Total stockholders' equity.......................................................... 421,213 345,181
----------- -----------
Total liabilities and stockholders' equity.......................................... $ 629,079 $ 496,184
----------- -----------
----------- -----------
The accompanying notes are an integral part of this statement.
20
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN 000'S EXCEPT SHARE AMOUNTS)
CAPITAL
CONTRIBUTED
IN EXCESS
OF
COMMON PAR VALUE CUMULATIVE
SHARES OF SHARES RETAINED TRANSLATION
(NOTE 1) (NOTE 1) EARNINGS ADJUSTMENTS TOTAL
--------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1993........................... $ 40,468 $ 146,914 $ 3,786 $ (5,094) $ 186,074
Issuance of common shares:
98,820 -- exercise of stock options............ 99 226 -- -- 325
138,130 -- stock purchase plan................. 138 585 -- -- 723
Net income for the year ended June 30, 1994...... -- -- 15,714 -- 15,714
Cumulative translation adjustments............... -- -- -- 107 107
--------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1994........................... 40,705 147,725 19,500 (4,987) 202,943
Issuance of common shares:
417,400 -- exercise of stock options........... 417 1,351 -- -- 1,768
148,064 -- stock purchase plan................. 148 767 -- -- 915
9,090,000 -- stock offering.................... 9,090 88,008 -- -- 97,098
Tax benefits from exercise of stock options and
stock purchase plan............................. -- 2,295 -- -- 2,295
Net income for the year ended June 30, 1995...... -- -- 39,398 -- 39,398
Cumulative translation adjustments............... -- -- -- 764 764
--------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1995........................... 50,360 240,146 58,898 (4,223) 345,181
Issuance of common shares:
339,090 -- exercise of stock options........... 339 3,073 -- -- 3,412
122,169 -- stock purchase plan................. 122 1,339 -- -- 1,461
Tax benefits from exercise of stock options and
stock purchase plan............................. -- 1,305 -- -- 1,305
Tax benefits from exercise of warrants (Note
3).............................................. -- 3,525 -- -- 3,525
Net income for the year ended June 30, 1996...... -- -- 66,479 -- 66,479
Cumulative translation adjustments............... -- -- -- (150) (150)
--------- ----------- ----------- ----------- -----------
BALANCE, JUNE 30, 1996........................... $ 50,821 $ 249,388 $ 125,377 $ (4,373) $ 421,213
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of this statement.
21
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN 000'S)
FISCAL YEARS ENDED JUNE 30,
--------------------------------------
1996 1995 1994
------------ ------------ ----------
Cash flow from operating activities:
Net income............................................................. $ 66,479 $ 39,398 $ 15,714
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization........................................ 30,144 23,444 18,018
Deferred income...................................................... 1,594 (524) (203)
Deferred income taxes................................................ 13,420 (1,178) 272
Deferred compensation................................................ 3,015 1,471 1,473
Change in working capital (Note 1)..................................... (27,078) 3,707 (9,109)
------------ ------------ ----------
Net cash provided by operating activities................................ 87,574 66,318 26,165
------------ ------------ ----------
Cash flow from investing activities:
Additions to property, plant, and equipment............................ (112,275) (106,902) (24,686)
Purchase of short-term investments..................................... (68,821) (57,581) --
Proceeds from sale of short-term investments........................... 53,821 54,581 --
Investment in other noncurrent assets.................................. (8,741) (3,615) (4,979)
------------ ------------ ----------
Net cash used in investing activities.................................... (136,016) (113,517) (29,665)
------------ ------------ ----------
Cash flow from financing activities:
Proceeds from issuance of (payments on) short-term bank debt, net...... (2,904) (11,542) 2,623
Proceeds from issuance of long-term debt............................... 36,495 9,435 10,326
Payments on long-term debt and obligations under capital leases........ (9,010) (11,302) (5,809)
Net proceeds from issuance of common stock............................. 6,178 99,781 1,048
Other.................................................................. 3,523 (1,979) (125)
------------ ------------ ----------
Net cash provided by financing activities................................ 34,282 84,393 8,063
------------ ------------ ----------
Effect of exchange rate changes on cash and cash equivalents............. (900) 575 (57)
------------ ------------ ----------
Net increase (decrease) in cash and cash equivalents..................... (15,060) 37,769 4,506
Cash and cash equivalents beginning of year.............................. 50,820 13,051 8,545
------------ ------------ ----------
Cash and cash equivalents end of year.................................... $ 35,760 $ 50,820 $ 13,051
------------ ------------ ----------
------------ ------------ ----------
The accompanying notes are an integral part of this statement.
22
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
International Rectifier Corporation ("IR" or the "Company") designs,
manufactures, and markets power semiconductors which switch or condition
electricity at relatively high voltage and current levels. The Company's
products are used in major market sectors including automobiles, computer/
peripherals, office equipment, consumer electronics, lighting, communications,
and industrial.
IR was founded as a California corporation in 1947 and reincorporated in
Delaware in 1979.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all its majority-owned subsidiaries which are located in Europe, Mexico,
Canada, the Far East, and South East Asia. All material intercompany
transactions have been eliminated.
FISCAL YEAR
Fiscal years 1996, 1995, and 1994 consist of 52 weeks ending June 30, July
2, and July 3, respectively. For convenience, all references herein to fiscal
years are to fiscal years ended June 30.
REVENUE RECOGNITION
The Company recognizes revenues from product sales to all customers,
including distributors, at the time of shipment.
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of the Company's foreign
subsidiaries are measured using the local currency as the functional currency.
Foreign assets and liabilities in the consolidated balance sheet have been
translated at the rate of exchange on the balance sheet date. Revenues and
expenses are translated at the average exchange rate for the year. Unrealized
translation adjustments do not affect the results of operations and are reported
as a separate component of stockholders' equity. In fiscal 1996, 1995, and 1994,
the Company recognized foreign currency transaction gains of $126,000, $347,000,
and $376,000, respectively.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
ADVERTISING
The Company reports the costs of all advertising as expenses in the periods
in which those costs are incurred. The Company shares portions of certain
distributors' advertising expenses through cooperative advertising arrangements.
INCOME TAXES
Deferred income taxes are determined based on the difference between the
financial reporting and tax bases of assets and liabilities using enacted rates
in effect during the year in which the differences are expected to reverse.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is the tax
payable for the period and the change during the period in deferred tax assets
and liabilities.
U.S. income taxes have not been provided on approximately $24,236,000 of
undistributed earnings of foreign subsidiaries since management considers these
earnings to be invested indefinitely or substantially offset by foreign tax
credits.
23
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK SPLIT
On November 20, 1995, the Board of Directors declared a two-for-one split of
the Company's common stock. Shares were distributed on December 22, 1995 to
stockholders of record on December 1, 1995. Stockholders' equity has been
retroactively restated for all periods presented by reclassifying from capital
contributed in excess of par value of shares to common shares the par value of
the additional shares arising from the split. In addition, all references in the
financial statements to number of shares, per share amounts, stock option data,
and market prices of the Company's common stock have been restated to reflect
the split.
EARNINGS PER SHARE
Earnings per share is computed by dividing earnings by the weighted average
number of common and common stock equivalents outstanding. Stock options
outstanding under stock option plans are considered common stock equivalents.
Common stock equivalents for stock options of 807,679, 486,112, and 225,400 were
utilized in the computation of earnings per share in 1996, 1995, and 1994
respectively.
STATEMENT OF CASH FLOWS
The Company invests excess cash from operations in investment grade money
market instruments. The Company considers all highly liquid debt instruments
with a purchased maturity of three months or less to be cash equivalents.
Components in the change in working capital for the fiscal years ended June 30,
1996, 1995, and 1994 were comprised of the following (000's):
1996 1995 1994
---------- ---------- ----------
Trade accounts receivable, net.......... $ (35,760) $ (23,938) $ (11,701)
Inventories............................. (9,890) 613 (10,427)
Prepaid expenses........................ (1,713) 737 (1,031)
Accounts payable........................ 13,838 16,787 9,123
Accrued salaries, wages, and
commissions............................ 2,288 1,277 918
Other accrued expenses.................. 4,159 8,231 4,009
---------- ---------- ----------
$ (27,078) $ 3,707 $ (9,109)
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosures of cash flow information (000's):
1996 1995 1994
--------- --------- ---------
Cash paid during the year for:
Interest.............................. $ 4,489 $ 4,578 $ 3,612
Income taxes.......................... 15,760 3,879 802
Interest capitalized.................... 1,371 2,164 453
Non cash financing activity:
Assets acquired through capital
leases............................... -- 792 12,675
Included in assets acquired through capital leases in 1994 is $7.2 million
in existing operating leases that were renegotiated to capital leases.
SHORT-TERM INVESTMENTS
The Company's short-term investments consist of investment grade money
market instruments. All of the Company's investments have original maturities of
less than one year. In accordance with the criteria established by Statement of
Financial Accounting Standard No. 115, "Accounting for
24
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Certain Investments in Debt and Equity Securities," all investments have been
classified as "available-for-sale." The Company utilizes the specific
identification method for determining the cost of the investments. At June 30,
1996 and 1995 the cost of the investments approximates the market value.
INVENTORIES
Inventories are stated at the lower of cost (principally first-in,
first-out) or market. Inventories at June 30, 1996 and 1995 were comprised of
the following (000's):
1996 1995
--------- ---------
Raw materials........................... $ 20,203 $ 19,974
Work-in-process......................... 40,895 32,967
Finished goods.......................... 21,754 20,214
--------- ---------
$ 82,852 $ 73,155
--------- ---------
--------- ---------
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Upon retirement or other
disposal, the asset cost and related accumulated depreciation are removed from
the accounts and any gain or loss on disposition is included in income.
Depreciation is provided on the straight-line method, based on the estimated
useful lives of the assets, or the units of production method based upon the
estimated output of the equipment. Depreciation expense for the fiscal years
ended June 30, 1996, 1995, and 1994 was $28,958,000, $21,819,000, and
$15,880,000, respectively. Property, plant, and equipment at June 30, 1996 and
1995 were comprised of the following (000's):
1996 1995
------------ ------------
Buildings and improvements.............. $ 75,863 $ 73,027
Equipment............................... 331,712 210,934
Construction in progress................ 72,595 84,318
Less accumulated depreciation........... (160,167) (130,480)
------------ ------------
320,003 237,799
Land.................................... 7,975 7,419
------------ ------------
$ 327,978 $ 245,218
------------ ------------
------------ ------------
Depreciation of improvements to leased premises is provided on the
straight-line method over the shorter of the remaining term of the lease or
estimated useful lives of the improvements. Capital leases included in property,
plant, and equipment at June 30, 1996 and 1995 were as follows (000's):
1996 1995
---------- ----------
Equipment............................... $ 59,458 $ 62,751
Less accumulated depreciation........... (40,744) (38,980)
---------- ----------
$ 18,714 $ 23,771
---------- ----------
---------- ----------
Repairs and maintenance costs are charged to expense. In the fiscal years
ended June 30, 1996, 1995, and 1994, repairs and maintenance costs were
$16,620,000, $11,977,000, and $8,144,000, respectively.
INTANGIBLE ASSETS
Patent and related costs are amortized using the straight-line method over
the life of the related patent portfolio.
25
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF RISK
The Company places its temporary cash investments with high credit quality
financial institutions. At times, such investments may be in excess of insured
limits.
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Receivables on average are
due in 60 days. Credit losses have consistently been within management's
expectations.
FINANCIAL INSTRUMENTS
The Company operates internationally, giving rise to exposure to market
risks from changes in foreign exchange rates. The Company enters into forward
foreign contracts and foreign currency options to hedge certain foreign currency
denominated receivables and payables from its foreign subsidiaries. The related
gains and losses on these contracts are included in "Other income (expense)."
The Company does not hold or issue financial instruments for trading purposes.
Forward contracts outstanding at June 30, 1996 had maturities of less than
three months and were denominated in Japanese Yen, British Pound Sterling, and
French Francs. Counterparties to the transactions were large financial
institutions. At June 30, 1996, the Company had $22.6 million outstanding in
forward contracts and had no outstanding foreign currency options.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
This statement will be effective for the Company's year ending June 30, 1997.
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable by using the future undiscounted cash flows expected from
the use of the eventual disposition of the asset. Management anticipates
implementing SFAS No. 121 effective July 1, 1996 and believes implementation
will not have a material impact on the Company's financial position, results of
operations, or cash flows.
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which will be effective for the Company's year ending June 30,
1997. SFAS No. 123 provides alternative accounting treatment to Accounting
Principles Board Opinion No. 25 with respect to stock-based compensation and
requires certain additional disclosures, including disclosures if the Company
elects not to adopt the accounting measurement requirements of SFAS No. 123. The
Company does not intend to adopt the accounting measurement requirements of SFAS
No. 123 for stock options granted to employees and therefore in future years
will provide the required additional disclosures in the notes to the
consolidated financial statements.
RECLASSIFICATION
Certain reclassifications have been made to previously reported amounts to
conform with the current year presentation.
26
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BANK LOANS AND LONG-TERM DEBT
In February 1996, the Company renewed and modified its existing $5 million
unsecured credit facility from Sanwa Bank California. The expiration date was
extended to October 31, 1997, and the interest rate for loans drawn under this
facility was reduced to the bank's cost of funds plus 0.75%, or LIBOR plus
0.75%. In May 1996, the Company extended and modified its existing $25 million
unsecured credit facility with Wells Fargo Bank, N.A. The expiration date was
extended to October 30, 2000, and the interest rate for loans drawn under this
facility was reduced to LIBOR plus 0.75%. In June 1996, the Company renewed its
$10 million unsecured credit facility with Nationsbank of Texas, N.A. The
expiration date of this facility was extended to June 5, 1997 and the interest
rate for loans drawn under this facility was reduced to LIBOR plus 0.75%. These
facilities all contain the same financial covenants and ratios which affect the
availability of funds and prohibit the Company from paying cash dividends. As of
June 30, 1996, no borrowings were outstanding under these three facilities.
The Company has an additional $31.0 million of revolving credit facilities
at foreign locations. The interest rates on borrowings from these facilities
range from 1.5% to 10.75% at June 30, 1996. Under the terms of the agreements,
the availability of funds is affected by various financial covenants and
collateral requirements. At June 30, 1996, $13.3 million was outstanding under
these foreign facilities, and the weighted average interest rate was 5.29%.
Based on covenant and collateral limitations under the above revolving
credit facilities, the Company had an additional $49.5 million available for
borrowing at June 30, 1996.
In February 1996, the Company modified its unsecured term loan facility for
$25 million with Sanwa Bank California ("Sanwa Term Facility"). The size of this
facility was reduced to $19.7 million and the interest rate for loans drawn
under this facility was reduced to LIBOR plus 0.75%. Principal repayments on
loans under the Sanwa Term Facility are required to be made in equal quarterly
installments from March 1998 through December 2001. This facility contains the
same financial covenants and ratios as contained in the three unsecured
revolving credit facilities mentioned above. At June 30, 1996, there was $19.7
million outstanding under this facility.
In March 1996, the Company entered into a second unsecured term loan
facility for $25 million with Sanwa Bank California ("Sanwa Term Facility #2").
Under this facility, the Company may draw up to $25 million prior to December
31, 1996. Interest rates for loans drawn under this facility are at prime, or
LIBOR plus 0.75%, or the bank's cost of funds plus 0.75% (at the Company's
option). Principal repayments on loans under the Sanwa Term Facility #2 are
required to be made in equal quarterly installments from March 1999 through
December 2002. This facility contains the same financial covenants and ratios as
contained in the three unsecured revolving credit facilities mentioned above. At
June 30, 1996, no borrowings were outstanding under this facility.
In June 1996, the Company entered into an unsecured term loan facility for
$20 million with Sumitomo Trust & Banking Co., Ltd., Los Angeles Agency
("Sumitomo Facility") and a separate unsecured term loan facility for $20
million with Banque Nationale de Paris, Los Angeles Branch ("BNP Facility").
From each of these facilities, the Company may draw up to $20 million prior to
June 30, 1997. Interest rates for loans drawn under the Sumitomo Facility are at
LIBOR plus 0.65%, and interest rates for loans drawn under the BNP Facility are
at LIBOR plus 0.55%. Principal repayments on loans under the Sumitomo Facility
are required to be made in equal semi-annual installments from December 1998
through June 2001. Principal repayments on loans under the BNP Facility are
required to be made in equal quarterly installments from September 1998 through
June 2001. These facilities contain the same financial covenants and ratios as
contained in the three unsecured revolving credit facilities mentioned above. At
June 30, 1996, no borrowings were outstanding under these facilities.
27
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BANK LOANS AND LONG-TERM DEBT (CONTINUED)
In December 1995, the Company modified and extended its secured credit
facility with NationsBanc Leasing Corporation of North Carolina. The Company has
available $22.5 million for capital equipment, which may be drawn down prior to
December 28, 1996. This facility contains no financial covenants.
The following is a summary of the Company's long-term debt and other loans
at June 30, 1996 and 1995 (000's):
1996 1995
---------- ---------
Capitalized lease obligations payable in varying monthly installments primarily at rates
from 6.0% to 12.6%....................................................................... $ 9,285 $ 13,221
Domestic bank loans collateralized by equipment, payable in varying monthly
installments at rates from 6.6% to 8.7%, due in 1998 through 2000........................ 17,199 8,337
Domestic unsecured bank loans payable in varying monthly installments at rates from 6.2%
to 6.3%, due in 2001..................................................................... 19,700 --
Foreign bank loans collateralized by property and/or equipment, payable in varying monthly
installments at rates from 8.0% to 10.8%, due in 1997 through 2000....................... 4,743 3,894
Foreign unsecured bank loans payable in varying monthly installments at rates from 2.6% to
8.4%, due in 1998 through 2006........................................................... 7,335 6,414
---------- ---------
58,262 31,866
Less current portion of long-term debt.................................................... (10,268) (7,985)
---------- ---------
$ 47,994 $ 23,881
---------- ---------
---------- ---------
Principal payments on long-term debt are as follows: 1998 $13,657,000; 1999
$13,833,000; 2000 $10,451,000; 2001 $6,912,000; and $3,141,000 thereafter.
During fiscal years 1996, 1995, and 1994, the Company incurred interest
expense of $4,851,000, $5,098,000, and $4,186,000, respectively.
In accordance with Statement of Financial Accounting Standards No. 107
"Disclosures About Fair Value of Financial Instruments," the fair values of the
Company's long-term debt has been estimated based on current rates offered to
the Company for debt of the same remaining maturities. The carrying amounts of
the Company's loans approximate their fair values.
3. CAPITAL STOCK
EMPLOYEE STOCK PURCHASE PLAN
The Company has an employee stock purchase plan. Under this plan employees
are allowed to designate between two and ten percent of their base compensation
to purchase shares of the Company's common stock at 85 percent of fair market
value. In November 1993, the stock purchase plan was amended to cover an
additional 2,000,000 shares. During fiscal 1996 and 1995, 122,169 and 148,064
shares were purchased at an aggregate purchase price of $1,461,000 and $915,000,
respectively. Shares authorized under this plan that remained unissued were
1,839,731 and 1,961,942 at June 30, 1996 and 1995, respectively.
STOCK OPTION PLANS
The Company has two stock option plans, the 1984 and 1992 plans, as amended.
Under these plans, options to purchase shares of the Company's common stock are
issued to key employees as well as members of the Company's Board of Directors.
Options are issued at 100% of the fair value of the Company's common stock at
the date of grant and become exercisable in annual installments of 20%,
28
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. CAPITAL STOCK (CONTINUED)
beginning on the first anniversary date. The 1984 plan has expired. Exercisable
options outstanding under the 1984 plan expire between August 1996 and June
1999. The 1992 plan provides for an increase in shares available for grant under
the plan by 1.5% of total common stock outstanding on January 1 of each year. On
January 1, 1996, 1995, and 1994, 757,165, 748,422, and 609,006 shares,
respectively, were added to the plan. During fiscal year 1996, 400 shares
expired under the 1984 plan.
A summary of the status of options under the 1992 and 1984 plans is as
follows:
SHARES PRICE RANGE
------------- ------------------
Outstanding, June 30, 1993.............. 1,027,620 $2.00 to $10.81
Options granted....................... 480,000 5.50 to 8.50
Options exercised..................... (98,820) 2.00 to 7.69
Options expired or canceled........... (46,400) 2.88 to 10.81
-------------
Outstanding, June 30, 1994.............. 1,362,400 2.25 to 10.81
Options granted....................... 676,200 9.31 to 15.94
Options exercised..................... (417,400) 2.25 to 10.81
Options expired or canceled........... (16,800) 2.25 to 10.81
-------------
Outstanding, June 30, 1995.............. 1,604,400 2.94 to 15.94
Options granted....................... 581,825 16.75 to 23.81
Options exercised..................... (339,090) 2.94 to 15.94
Options expired or canceled........... (7,200) 6.00 to 23.81
-------------
Outstanding, June 30, 1996 at an average
price of $12.75........................ 1,839,935 $4.00 to $23.81
-------------
-------------
The following table summarizes the options exercisable:
SHARES PRICE RANGE
--------- ------------------
June 30, 1996........................... 379,230 $4.00 to $15.94
June 30, 1995........................... 379,280 3.75 to 10.81
June 30, 1994........................... 528,240 2.25 to 10.81
Additional information relating to the 1992 and 1984 plans at June 30, 1996,
1995, and 1994 is as follows:
1996 1995 1994
----------- ----------- -----------
Options available for grant............. 955,290 773,150 700,428
Total reserved common stock shares for
stock option plans..................... 2,795,225 2,377,550 2,062,828
WARRANTS
In connection with an April 24, 1991 public offering of the Company's common
stock, 700,000 warrants previously issued by the Company were exercised and sold
as part of the total shares offered. The difference between the exercise price
of the warrants and the public offering price of the stock was treated as
expense to the Company for federal and state income tax purposes. In fiscal year
1996, the income tax benefit of approximately $3,525,000 relating to the
exercise of the warrants was credited to capital contributed in excess of par
value.
29
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. CAPITAL STOCK (CONTINUED)
SHAREHOLDER RIGHTS PLAN (UNAUDITED)
On August 2, 1996, the Company's Board of Directors adopted a Shareholder
Rights Plan (the "Plan") under which preferred stock purchase rights (the
"Rights") will be granted for each outstanding share of the Company's common
stock held at the close of business on August 14, 1996. The Plan is intended to
ensure fair and equitable treatment for all shareholders in the event of
unsolicited attempts to acquire the Company.
The Rights will become exercisable ten days after a person or group (the
"Acquiror") has acquired beneficial ownership of 20% or more of the Company's
common stock other than pursuant to a qualified offer, or announces or commences
a tender offer or exchange offer that could result in the acquisition of
beneficial ownership of 20% or more. Once exercisable, each Right entitles the
holder to purchase one one-thousandth of a share of a new series of preferred
stock at an exercise price of $135, subject to adjustment to prevent dilution.
If the Acquiror acquires 20% or more of the Company's common stock, each Right
(except those held by the Acquiror) entitles the holder to purchase either the
Company's stock or stock in the merged entity at half of market value. The
Rights have no voting power, expire on August 14, 2006, and may be redeemed at a
price of $0.01 per Right up to and including the tenth business day after a
public announcement that 20% or more of the Company's shares have been acquired
by the Acquiror.
For additional information, refer to the Company's reports to the Securities
and Exchange Commission on Forms 8-K and 8-A filed on August 20, 1996 and August
21, 1996, respectively.
4. GEOGRAPHIC SEGMENTS AND FOREIGN OPERATIONS
The Company operates in one business segment. Transfers between geographic
areas are made at prices reflecting market conditions. Revenues from
unaffiliated customers is based on the location of the customer. Geographic
segment information, including sales and transfers between geographic areas, for
the fiscal years ended June 30, 1996, 1995, and 1994 is presented below (000's):
1996 1995 1994
------------ ------------ ------------
Revenues from Unaffiliated Customers
United States......................................................... $ 266,514 $ 196,520 $ 154,684
Europe................................................................ 158,853 122,391 87,245
Other................................................................. 151,482 110,115 86,953
------------ ------------ ------------
Total............................................................... $ 576,849 $ 429,026 $ 328,882
------------ ------------ ------------
------------ ------------ ------------
Transfers between Geographic Areas
United States......................................................... $ 60,694 $ 47,196 $ 36,261
Europe................................................................ 134,395 82,439 59,119
Other................................................................. 97,238 69,418 52,759
------------ ------------ ------------
Total............................................................... $ 292,327 $ 199,053 $ 148,139
------------ ------------ ------------
------------ ------------ ------------
Total Revenues
United States......................................................... $ 327,208 $ 243,716 $ 190,945
Europe................................................................ 293,248 204,830 146,364
Other................................................................. 248,720 179,533 139,712
Intersegment eliminations............................................. (292,327) (199,053) (148,139)
------------ ------------ ------------
Total............................................................... $ 576,849 $ 429,026 $ 328,882
------------ ------------ ------------
------------ ------------ ------------
30
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. GEOGRAPHIC SEGMENTS AND FOREIGN OPERATIONS (CONTINUED)
1996 1995 1994
------------ ------------ ------------
Operating Profit
United States......................................................... $ 82,276 $ 38,924 $ 18,173
Europe................................................................ 6,704 7,428 4,710
Other................................................................. 7,727 2,036 666
------------ ------------ ------------
Total............................................................... $ 96,707 $ 48,388 $ 23,549
------------ ------------ ------------
------------ ------------ ------------
Identifiable Assets
United States (1)..................................................... $ 362,497 $ 269,737 $ 189,591
Europe................................................................ 123,994 93,517 74,533
Other................................................................. 43,327 35,765 28,696
------------ ------------ ------------
Total............................................................... $ 529,818 $ 399,019 $ 292,820
------------ ------------ ------------
------------ ------------ ------------
U.S. Export Sales to Unaffiliated Customers by Destination of Sale
Europe................................................................ $ 19,863 $ 9,231 $ 4,362
Asia.................................................................. 24,762 18,026 20,094
Other................................................................. 2,830 3,345 4,829
------------ ------------ ------------
Total............................................................... $ 47,455 $ 30,602 $ 29,285
------------ ------------ ------------
------------ ------------ ------------
- ------------------------
(1) Excluding general corporate assets.
5. INCOME TAXES
The major components of the net deferred tax asset (liability) as of June
30, 1996 and 1995 are as follows (000's):
1996 1995
---------- ----------
Deferred tax liabilities:
Depreciation.................................... $ (22,638) $ (10,446)
Effect of state taxes........................... (1,415) (502)
Other........................................... (435) --
---------- ----------
Total deferred tax liabilities.................. (24,488) (10,948)
---------- ----------
Deferred tax assets:
Reserves for books, not deducted................ 10,334 5,431
Credit carryovers............................... 3,844 5,894
Other........................................... 955 178
---------- ----------
Total deferred tax assets....................... 15,133 11,503
---------- ----------
Net deferred tax asset (liability)................ $ (9,355) $ 555
---------- ----------
---------- ----------
31
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
Income before income taxes for the fiscal years ended June 30, 1996, 1995,
and 1994 is as follows (000's):
1996 1995 1994
--------- --------- ---------
Operations:
Domestic.............................. $ 86,231 $ 39,719 $ 15,626
Foreign............................... 9,699 7,748 3,248
--------- --------- ---------
$ 95,930 $ 47,467 $ 18,874
--------- --------- ---------
--------- --------- ---------
The provision (benefit) for income taxes for the fiscal years ended June 30,
1996, 1995, and 1994 consists of (000's):
1996 1995 1994
--------- --------- ---------
Current income taxes:
Domestic.............................. $ 16,948 $ 6,356 $ 1,539
Foreign............................... 2,593 2,874 1,331
--------- --------- ---------
19,541 9,230 2,870
--------- --------- ---------
Deferred income taxes:
Domestic.............................. 8,695 (1,458) --
Foreign............................... 1,215 297 290
--------- --------- ---------
9,910 (1,161) 290
--------- --------- ---------
Total provision......................... $ 29,451 $ 8,069 $ 3,160
--------- --------- ---------
--------- --------- ---------
Deferred taxes result primarily from temporary differences relating to
depreciation, financial statement reserves, and state taxes.
The Company's effective tax rate on pretax income differs from the U.S.
Federal Statutory tax rate for the fiscal years ended June 30, 1996, 1995, and
1994 as follows:
1996 1995 1994
--------- --------- ---------
Statutory tax rate................................ 35.0% 35.0% 35.0%
Change in valuation allowance..................... -- (21.7) (24.8)
Foreign tax differential.......................... 1.4 1.8 2.6
Foreign tax credit benefit........................ (2.0) (1.8) --
Foreign sales corporation benefit................. (0.8) -- --
State taxes, net of federal tax benefit........... (1.2) 1.0 1.5
Other tax credits................................. -- (1.2) --
Other, net........................................ (1.7) 3.9 2.4
--- --------- ---------
30.7% 17.0% 16.7%
--- --------- ---------
--- --------- ---------
During fiscal 1996, the Company fully utilized its $4.9 million of U.S.
federal income tax credit carryovers. At June 30, 1996, the Company has
approximately $3.8 million of state tax credits which expire in 2002.
6. PROFIT SHARING AND RETIREMENT PLANS
The Company has established defined contribution plans for all eligible
employees. The Profit Sharing and Retirement Plan provided for contributions by
the Company in such amounts as the Board of Directors determined annually.
Effective November 1, 1995, the Company elected to terminate its Profit Sharing
and Retirement Plan in order to focus on improvements in its voluntary
32
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PROFIT SHARING AND RETIREMENT PLANS (CONTINUED)
Retirement Savings Plan (401K). Employees and former employees not fully vested
at time of the plan termination became 100% vested and were given various
distribution options as defined by ERISA. Under the established Retirement
Savings Plan (401K), the Company made an annual contribution for each
participating employee of up to $1,200 in fiscal year 1996 and up to $600 in
fiscal years 1995 and 1994. Combined plan contributions by the Company totaled
$1,021,000, $1,027,000, and $841,000 for fiscal years 1996, 1995, and 1994,
respectively.
7. ENVIRONMENTAL MATTERS
Federal, state, and local laws and regulations impose various restrictions
and controls on the discharge of certain materials, chemical, and gases used in
semiconductor processing. The Company does not believe that compliance with such
laws and regulations will have a material adverse effect on its financial
position.
The Company and Rachelle Laboratories, Inc. ("Rachelle"), its former
pharmaceutical subsidiary which discontinued operations in 1986, have been named
among several hundred entities as potentially responsible parties ("PRPs") under
the provisions of the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("CERCLA"), in connection with the United States
Environmental Protection Agency's ("EPA") investigation of the disposal of
allegedly hazardous substances at a major superfund site in Monterey Park,
California (the "OII Site"). Certain PRPs who settled certain claims with the
EPA under consent decrees filed suit in Federal Court in May 1992 against a
number of other PRPs, including the Company, for cost recovery and contribution
under CERCLA. The lawsuit against the Company, relating to the first and second
consent decrees, was settled in August 1993 for the sum of $40,000 to avoid
protracted and expensive litigation. In June 1995, the Company was named among
others as a party defendant in Federal Court apparently in connection with a
third consent decree with respect to the OII Site. The Company received a letter
(dated July 25, 1995) from the U.S. Department of Justice offering to settle
claims against Rachelle relating to the first three elements of clean-up work at
the OII Site for the sum of $4,953,148 (the final remedy assessment has not yet
been made). This settlement offer expired by its terms on September 1, 1995. The
Company also received a separate letter from the EPA dated July 25, 1995, with
respect to International Rectifier only, notifying the Company that it may
qualify for a settlement with de minimis generators under CERCLA Section 122(g).
The Company has received no further communications in this regard. At an August
17, 1995 meeting with EPA representatives and representatives of other PRPs, EPA
representatives stated that they will not have an estimate of the cost of final
clean-up until at least early 1996. The Company is unaware of any estimate of
the cost of final clean-up of the site.
On August 7, 1995, the Company received a Supplemental Information Request
from the EPA, directed to Rachelle. In its response, dated October 20, 1995, the
Company explained that none of the wastes generated by Rachelle were hazardous.
The Company has received no further communications in connection with the
Supplemental Information Request.
Claims have been made with the Company's insurers with respect to the OII
site matter; however, there can be no assurance that the insurance coverage
attaches to these claims. The Company does not believe that either it or
Rachelle is responsible for the disposal at the OII site of any material
constituting hazardous substances under CERCLA. Although the ultimate resolution
of this matter is unknown, the Company believes that it will not have a material
adverse impact on its financial position.
In May 1993, the Company purchased property from its Employee Profit Sharing
and Retirement Plan. It was determined that the property required clean-up of
seepage from a storage tank, at an
33
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. ENVIRONMENTAL MATTERS (CONTINUED)
estimated additional cost of $525,000. The Company commenced the clean-up in
fiscal year 1994, and through June 30, 1996 approximately $518,000 in clean-up
costs have been incurred which will be capitalized as additional costs of the
property.
On July 18, 1994, the Company received a letter from the State of Washington
Department of Ecology (the "Department") notifying the Company of a proposed
finding that the Company is a potentially liable person ("PLP") for alleged PCE
contamination (also known as perchloroethylene, tetrachloroethylene, and other
names) of real property and groundwater in Yakima County, Washington. The letter
alleges that the Company arranged for disposal or treatment of the PCE or
arranged with a transporter for the disposal or treatment of the PCE in Yakima
County. The Company replied by a letter dated August 11, 1994, stating that it
has not contributed to PCE or other solvent contamination at the Yakima County
site (resulting from sending carbon canisters for regeneration to a facility in
the county) and that it should not be designated a PLP. On October 11, 1994, the
Company received a letter from the Department notifying the Company of its
finding that the Company is a PLP in the above matter. On June 20, 1996, the
Company received a letter from the Washington Department of Ecology, stating
that a settlement offer would be extended to all potentially liable persons in
late summer or early fall of 1996. While the letter did not commit to the amount
of any settlement, it predicted a settlement of approximately $4.95 for each
pound of carbon sent to Cameron-Yakima.
The Company received a letter dated September 9, 1994, from the State of
California Department of Toxic Substances Control stating that the Company may
be a PRP for the deposit of hazardous substances at a facility in Whittier,
California. The Company, in June 1995, agreed to join a group of other PRPs to
remove contamination from the site. The group currently estimates the total cost
of the clean-up to be between $3.1 million and $4 million, of which between
$12,000 and $15,000 is presently expected to be allocated to the Company.
However, the ultimate cost borne by the Company will depend on the extent of the
clean-up undertaken by the group and the actual clean-up costs and the final
allocation scheme agreed upon by the group.
8. COMMITMENTS
The future minimum lease commitments under non-cancelable capital and
operating leases of equipment and real property at June 30, 1996 are as follows
(000's):
CAPITAL OPERATING TOTAL
FISCAL YEARS LEASES LEASES COMMITMENTS
- ---------------------------------------- --------- --------- -------------
1997.................................... $ 4,771 $ 6,322 $ 11,093
1998.................................... 4,238 3,600 7,838
1999.................................... 1,186 2,168 3,354
2000.................................... 20 1,629 1,649
2001.................................... -- 1,496 1,496
Later years............................. -- 3,111 3,111
Less imputed interest................... (930) -- (930)
--------- --------- -------------
Total minimum lease payment............. $ 9,285 $ 18,326 $ 27,611
--------- --------- -------------
--------- --------- -------------
Total rental expense on all operating leases charged to income was
$8,193,000, $7,965,000, and $6,723,000 in fiscal years 1996, 1995, and 1994,
respectively.
9. INTELLECTUAL PROPERTY RIGHTS
Certain of the Company's fundamental power MOSFET patents have been
subjected, and continue to be subjected, to reexamination in the United States
Patent and Trademark Office ("PTO"). The patents subject to reexamination are
fundamental to the Company's MOS transistors and their loss would allow
competitors to use currently patented features of the Company's MOS transistor
34
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INTELLECTUAL PROPERTY RIGHTS (CONTINUED)
technology without liability for infringement of those patents. On the following
dates, the PTO granted requests for reexamination of the following patents of
the Company: November 13, 1992 and September 12, 1994 on patent 4,642,666;
October 13, 1993 on patent 4,705,759; September 12, 1994 on patent 4,959,699;
September 23, 1994 and June 28, 1995 on patent 5,008,725; January 17, 1995 on
patent 5,130,767; June 5, 1995 on patent 5,191,396; and June 14, 1995 on patent
4,593,302. On February 14, 1995 and on December 26, 1995, respectively, the PTO
issued reexamination certificates, confirming the patentability of the Company's
U.S. patents 4,705,759 and 5,191,396.
10. LITIGATION
The Company and SGS-Thomson Microelectronics, Inc. ("SGS") are engaged in
various legal proceedings relating to their respective power MOSFET patents. SGS
filed suit against the Company in June 1991 in Federal District Court in Texas,
charging infringement of U.S. patent 4,553,314. On motion by the Company, the
suit was transferred to the Federal District Court in Los Angeles, California,
and thereafter SGS amended its complaint to charge infringement of U.S. patents
4,495,513 and 4,712,127. SGS alleges, in substance, that the Company's power
MOSFET, power IC and IGBT products infringe the '314 patent, that the Company's
IGBT products infringe the '513 patent, and that certain packages for the
Company's products (including certain power MOSFET packages) infringe the '127
patent. The complaint, as amended, seeks unspecified actual damages (but no less
than an unspecified reasonable royalty) and an injunction restraining further
sales of such products. On February 1, 1993, the District Court dismissed SGS's
claims for infringement of the '127 and '513 patents for lack of standing and on
March 15, 1993, ruled that the SGS '314 patent is unenforceable due to
inequitable conduct. SGS appealed these rulings, as well as the order
transferring the case to California, to the Court of Appeals for the Federal
Circuit. The Company cross-appealed a separate ruling by the District Court
denying the Company's motion for summary judgment that the '314 patent is
invalid. In July 1994, the Federal Circuit vacated the District Court's grants
of summary judgment as to the '513, '127, and '314 patents and affirmed the
District Court's denial of the Company's motion for summary judgment of
invalidity of the '314 patent. The Federal Circuit ordered, however, that the
case should proceed in California. On July 5, 1995, the Court, based on the
stipulation of the parties, effectively stayed SGS's claims on its '314 and '127
patents pending the outcome of reexamination of the patentability of the subject
matter of those patents by the PTO. These reexamination proceedings are still
pending.
In November and December 1995, the parties presented testimony and evidence
to the District Court concerning the interpretation of the claims of the '513
patent; and the Court has not yet ruled on the matter.
The Company has also filed a separate action in the same District Court
against SGS and its Italian affiliate, SGS-Thomson Microelectronics, S.r.l.,
seeking an injunction against infringement of the Company's U.S. patents
5,008,725 and 5,130,767. This action has been essentially stayed pending
completion of reexamination of these patents by the PTO (see Note 9).
The Company filed another separate action in the same District Court on
August 13, 1996, against the same SGS entities charging infringement of its U.S.
patent 5,545,955.
In the Fall of 1995, SGS and SGS-Thomson Microelectronics, S.A.
("SGS-France") commenced an infringement action in Great Britain against the
Company and International Rectifier (Great Britain) Limited ("IRGB") based on
the European counterpart patent to the '513 patent (European Patent (UK) No.
0,068,546). The Company and IRGB have filed a response denying the material
allegations plead by SGS and SGS-France and seek revocation of the foreign
counterpart patents at issue. The British action is set for trial in July 1997.
35
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. LITIGATION (CONTINUED)
The Company, its directors, and certain officers have been named as
defendants in three class action lawsuits filed in Federal Court in California.
These suits seek unspecified but substantial compensatory and punitive damages
for alleged intentional and negligent misrepresentations and violations of the
federal securities laws. The complaints generally allege that the Company and
the other defendants made materially false statements or omitted to state
material facts in connection with the public offering of the Company's common
stock completed in April 1991 and the redemption and conversion in June 1991 of
the Company's 9% Convertible Subordinated Debentures Due 2010. They also allege
that the Company's projections for growth in fiscal 1992 were materially
misleading. Although the Company believes that the claims alleged in the suits
are without merit, the ultimate outcome cannot be presently determined. A
substantial judgment or settlement, if any, could have a material adverse effect
on the Company's financial condition and results of operations. Two of these
suits also name Kidder, Peabody & Co. Incorporated and Montgomery Securities as
defendants. Defendants Kidder, Peabody & Co. and Montgomery Securities have
demanded that the Company indemnify them for any liability or expenses,
including attorneys fees, that they may incur in connection with this
litigation. Those defendant underwriters base that demand on their underwriting
agreements with the Company. The Company has agreed to advance the underwriter
defendants' attorneys fees pursuant to that indemnity, subject to a reservation
of the Company's right to seek reimbursement of those advances.
No provision for any liability that may result upon adjudication of these
matters has been made in the consolidated financial statements.
The Company is currently involved in litigation arising in the normal course
of business. Management does not believe that the ultimate resolution of this
litigation will have a material adverse impact on the financial position of the
Company (also see Notes 7 and 9).
11. EXECUTIVE AGREEMENT
The Company entered into an executive agreement with Eric Lidow dated May
15, 1991 providing for his continued employment with the Company for a six year
period as Chief Executive Officer and President or in such other position as the
Board of Directors may determine. Mr. Lidow's salary at fiscal year end under
this agreement was $632,500. Upon Mr. Lidow's retirement from the Company (or a
change in control) he will receive annual payments (Founder's Pension) of 90% of
his then current salary. The agreement was amended on April 12, 1995 to provide
that upon retirement Mr. Lidow's pension would be based, in addition to his
salary, on the average of the prior three years' cash bonuses, if any. The
pension would further be adjusted annually to account for any increase in the
Consumer Price Index. Upon Mr. Lidow's death, payments will be continued to his
wife, if she survives him, in an amount equal to two-thirds of his retirement
benefits for the remainder of her life. Under the terms of the Founder's
Pension, $2,348,000, $1,068,000, and $572,000 have been expensed in fiscal years
1996, 1995, and 1994, respectively.
On October 24, 1995 (amended on February 22, 1996), the Company established
an irrevocable grantor trust (the "Trust") for payment of retirement benefits to
Eric Lidow and his wife. The principal of the Trust, and any earnings thereon,
shall be held separate and apart from other funds of the Company and shall be
used exclusively for the uses and purposes of providing the retirement benefits
described in the executive agreement (and for payments to general creditors if
the Company is unable to pay its debts as they become due or is subject to a
pending proceeding as a debtor under the United States Bankruptcy Code). Under
the Trust agreement, the Company funds the pro-rata liability accrual 30 days
following the end of each calendar quarter. At June 30, 1996, the balance in the
Trust was $5,219,000 and was included in "Other assets."
36
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data is as follows (000's except per share
data):
NET
GROSS NET INCOME
REVENUES PROFIT INCOME PER SHARE (A)
----------- --------- --------- -------------
1996
1st Quarter............................. $ 126,097 $ 47,311 $ 12,829 $ 0.25
2nd Quarter............................. 141,026 53,889 15,219 0.30
3rd Quarter............................. 154,070 60,094 18,011 0.35
4th Quarter............................. 155,656 64,509 20,420 0.40
1995
1st Quarter............................. $ 92,253 $ 31,514 $ 6,498 $ 0.16
2nd Quarter............................. 102,814 35,792 8,368 0.18
3rd Quarter............................. 111,867 39,506 10,752 0.21
4th Quarter............................. 122,092 44,012 13,780 0.27
- ------------------------
(A) Quarter net income per share is rounded to the nearest cent.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
37
PART III
For information called for by Items 10, 11, 12, and 13, reference is made to
the Registrant's definitive proxy statement for its Annual Meeting of
Stockholders, to be held November 25, 1996, which will be filed with the
Securities and Exchange Commission within 120 days after June 30, 1996, and
which is incorporated herein by reference. Certain information concerning the
Directors and Executive Officers of the Company is included in Part I. See
"Additional Item" page 10.
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
a. Financial Statements and Financial Statement Schedule being filed as
part of this report are listed in the index on page 17.
b. Exhibits filed as part of this report are listed on the Exhibit Index on
page 39.
38
EXHIBIT INDEX
Incorporated By Reference:
EXHIBIT
NO. ITEM DOCUMENT
- ------- ----------------------------- ----------------------------------------
3(a) Certificate of Incorporation Report on Form 10-Q for the quarterly
of the Company, as amended to period ended December 31, 1990, as
date amended by Form 8 dated March 6 and
March 12, 1991 as filed with the
Securities and Exchange Commission, File
No. 1-7935 (Exhibit 3(a))
3(b) Amended and restated By-Laws Form 10-Q -- for the quarterly period
of the Company ended March 31, 1995 as filed with the
Securities and Exchange Commission, File
No. 1-7935
10(a) Technical Assistance Registration Statement on Form S-2 as
Agreement dated March 30, filed with the Securities and Exchange
1983 between the Company and Commission, Registration No. 2-89410
Unitrode Corporation (Exhibit 10.8)
10(b) Amended and Restated Form 10-K -- Annual Report Pursuant to
Settlement Agreement between Section 13 or 15(d) of the Securities
International Rectifier Exchange Act of 1934 for Fiscal Year
Corporation and Siliconix Ended June 30, 1990, Commission File No.
incorporated dated July 27, 1-7935
1990
10(c) Amendment to Technical Report on Form 10-Q for the quarterly
Assistance Agreement, period ended December 31, 1990 as
effective as of August 27, amended by Form 8 dated April 15, 1991,
1987, by and between the Commission File No. 1-7935 (Exhibit
Company and Unitrode 10(l))
Corporation
10(d) International Rectifier Registration Statement on Form S-8 as
Corporation Stock Option Plan filed with the Securities and Exchange
of 1984 (Second Amendment) Commission, Registration No. 33-40208
10(e) Executive Employment Form 10-K -- Annual Report Pursuant to
Agreement dated May 15, 1991 Section 13 or 15(d) of the Securities
between International Exchange Act of 1934 for Fiscal Years
Rectifier Corporation and Ended June 30, 1991 and 1995, Commission
Eric Lidow and amended as of File No. 1-7935
April 12, 1995
10(f) International Rectifier Registration Statement on Form S-8 as
Corporation Stock Option Plan filed with the Securities and Exchange
of 1992 Commission, Registration No. 33-63958
(Exhibit 8)
10(g) Line of Credit Agreement Form 10-K -- Annual Report Pursuant to
between International Section 13 or 15(d) of the Securities
Rectifier Corporation and Exchange Act of 1934 for Fiscal Years
Sanwa Bank California dated Ended June 30, 1993, 1994, and 1995, and
as of June 30, 1993 and Form 10-Q for the quarterly period ended
amended as of August 24, March 31, 1996, Commission File No.
1993, November 22, 1993, July 1-7935
1, 1994, December 30, 1994,
February 28, 1995, and
February 29, 1996
39
EXHIBIT
NO. ITEM DOCUMENT
- ------- ----------------------------- ----------------------------------------
10(h) Amendment to International Registration Statement on Form S-8 as
Rectifier Corporation 1984 filed with the Securities and Exchange
Stock Participation Plan Commission, Registration No. 33-53589
(Exhibit 4.1)
10(i) Security Agreement between Form 10-K -- Annual Report Pursuant to
International Rectifier Section 13 or 15(d) of the Securities
Corporation and Nationsbanc Exchange Act of 1934 for Fiscal Years
Leasing Corporation of North Ended June 30, 1994 and 1995, Commission
Carolina dated as of July 1, File No. 1-7935
1994 and amended as of August
15, 1994, November 3, 1994,
and March 8, 1995
10(j) Revolving Credit Agreement Form 10-K -- Annual Report Pursuant to
between International Section 13 or 15(d) of the Securities
Rectifier Corporation and Exchange Act of 1934 for Fiscal Years
Wells Fargo Bank, N.A. dated Ended June 30, 1994 and 1995, Commission
as of July 1, 1994 and File No. 1-7935
amended as of December 30,
1994 and March 31, 1995
10(k) Loan and Security Agreement Form 10-K -- Annual Report Pursuant to
between Sanwa General Section 13 or 15(d) of the Securities
Equipment Leasing, a Division Exchange Act of 1934 for Fiscal Year
of Sanwa Business Credit Ended June 30, 1994, Commission File No.
Corporation and International 1-7935
Rectifier Corporation dated
as of July 1, 1994
10(l) Revolving Credit Agreement Form 10-K -- Annual Report Pursuant to
between International Section 13 or 15(d) of the Securities
Rectifier Corporation and Exchange Act of 1934 for Fiscal Year
Nationsbank of Texas, N.A. Ended June 30, 1995, Commission File No.
dated June 15, 1995 1-7935
10(m) Amendments to Term Loan Form 10-Q for the quarterly period ended
Agreement between March 31, 1996, Commission File No.
International Rectifier 1-7935
Corporation and Sanwa Bank
California dated as of
December 29, 1995 and
February 29, 1996
10(n) Term Loan Agreement between Form 10-Q for the quarterly period ended
International Rectifier March 31, 1996, Commission File No.
Corporation and Sanwa Bank 1-7935
California (Sanwa Term
Facility #2) dated March 26,
1996
40
SUBMITTED HEREWITH:
See page 17 for an index of Financial Statements and Schedules being filed
as part of this report.
EXHIBIT
NO. ITEM DOCUMENT
- ------- ----------------------------- ----------------------------------------
10(o) Term Loan Agreement between
International Rectifier
Corporation and Sanwa Bank
California dated February 28,
1995 and amended as of
December 29, 1995, February
29, 1996, and June 28, 1996
10(p) International Rectifier
Corporation Grantor Trust for
Retirement Benefits for Eric
Lidow dated October 24, 1995
and amended as of February
22, 1996
10(q) Amendments to Security
Agreement between
International Rectifier
Corporation and Nationsbanc
Leasing Corporation of North
Carolina dated as of December
29, 1995 and July 30, 1996
10(r) Amendment to Revolving Credit
Agreement between
International Rectifier
Corporation and Wells Fargo
Bank, N.A. dated as of May
15, 1996
10(s) Amendment to Revolving Credit
Agreement between
International Rectifier
Corporation and Nationsbank
of Texas, N.A. dated as of
June 6, 1996
10(t) Term Loan Agreement between
International Rectifier
Corporation and Sumitomo
Trust & Banking Co., LTD.,
Los Angeles Agency dated June
12, 1996
10(u) Term Loan Agreement between
International Rectifier
Corporation and Banque
Nationale de Paris, Los
Angeles Branch dated June 25,
1996
10(v) Amendment to Line of Credit
Agreement between
International Rectifier
Corporation and Sanwa Bank
California dated as of June
28, 1996
21 List of Subsidiaries
23 Consent of Independent
Accountants
27 Financial Data Schedule
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTERNATIONAL RECTIFIER CORPORATION
(Registrant)
By MICHAEL P. MCGEE Date: September 24, 1996
--------------------------------
Michael P. McGee
VICE PRESIDENT, CHIEF FINANCIAL
OFFICER AND PRINCIPAL ACCOUNTING
OFFICER
Each person whose signature appears below hereby authorizes Michael P.
McGee, as attorney-in-fact and agent, with full powers of substitution, to sign
on his behalf, individually and in the capacities stated below, and to file any
and all amendments to this Form 10-K, and other documents in connection
therewith, with the Securities and Exchange Commission, granting to said
attorney-in-fact and agent full power and authority to perform any other act on
behalf of the undersigned required to be done in the premises.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
- ------------------------------ -------------------------- ------------------
ERIC LIDOW Chairman of the Board September 24, 1996
- ------------------------------
Eric Lidow
ALEXANDER LIDOW Director, Chief Executive September 24, 1996
- ------------------------------ Officer
Alexander Lidow
DEREK B. LIDOW Director, Chief Executive September 24, 1996
- ------------------------------ Officer
Derek B. Lidow
ROBERT J. MUELLER Director, Executive Vice September 24, 1996
- ------------------------------ President
Robert J. Mueller
GEORGE KRSEK Director September 24, 1996
- ------------------------------
George Krsek
JACK O. VANCE Director September 24, 1996
- ------------------------------
Jack O. Vance
ROCHUS E. VOGT Director September 24, 1996
- ------------------------------
Rochus E. Vogt
DONALD S. BURNS Director September 24, 1996
- ------------------------------
Donald S. Burns
JAMES D. PLUMMER Director September 24, 1996
- ------------------------------
James D. Plummer
SCHEDULE II
INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE FISCAL YEARS ENDED JUNE 30, 1996, 1995 AND 1994
(IN 000'S)
ADDITIONS
-----------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COST AND CHARGED TO END
DESCRIPTION PERIOD EXPENSES OTHER DEDUCTIONS (1) OF PERIOD
- ------------------------------------------- ------------ ----------- ---------- -------------- -------------
1996
Allowance for doubtful accounts............ $ 901 $ 421 $ -- $ (308) $ 1,014
Deferred tax valuation allowance........... $ 0 $ -- $ -- $ -- $ 0
Inventory valuation reserve................ $ 5,029 $ 6,503 $ -- $ (5,448) $ 6,084
1995
Allowance for doubtful accounts............ $ 677 $ 703 $ -- $ (479) $ 901
Deferred tax valuation allowance........... $ 10,596 $ -- $ (10,596) $ -- $ 0
Inventory valuation reserve................ $ 2,798 $ 4,420 $ -- $ (2,189) $ 5,029
1994
Allowance for doubtful accounts............ $ 607 $ 577 $ -- $ (507) $ 677
Deferred tax valuation allowance........... $ 15,546 $ -- $ (4,950) $ -- $ 10,596
Inventory valuation reserve................ $ 2,052 $ 1,997 $ -- $ (1,251) $ 2,798
- ------------------------
(1) Deductions include the write-off of uncollectible amounts with respect to
trade accounts receivable, obsolete and scrap inventory, and the effects of
Statement of Financial Accounting Standards No. 52.
F-1