Headquartered in El Segundo, CA, International Rectifier Corporation (IRF) is an Original Equipment Manufacturer of power semiconductors that control, condition or convert electrical power in a wide range of end user applications. Management asserts that IRF is the leading global supplier of metal oxide semiconductor field effect transistors (MOSFETs), which are mainstay power components. The company has an extensive intellectual property (IP) portfolio.
Semiconductor devices are broadly divided into three categories: analog, digital and radio frequency (RF). Analog semiconductors condition and regulate real world information such as light, temperature, speed, pressure, power and electrical currents. Digital logic semiconductors process information in only two states. Mixed-signal semiconductors combine both analog and digital technology into a single device. Typically, an analog sensor samples real world information, and then converts the input into an electronic analog signal, which is converted into a digital format for further digital processing. The analog and mixed-signal markets tend to be more varied and specialized, with customized products that have longer life cycles than those in the digital industry segment. There is an ongoing drive to decrease the number of discrete devices, lessen power requirements and shrink the size of the existing devices, which correspondingly increase performance and reliability. Consequently, a greater amount of functionality is being consolidated into increasingly smaller devices. The Gartner Group estimated that the total worldwide semiconductor market was a $219.9 billion market in 2004. The analog market component grew 29% in 2004, to a $36.4 billion market, according to In-Stat, an industry trade group.
Products are manufactured along three segments: power components, analog integrated circuits (ICs) and advanced circuit devices, and power systems. Management also refers to the product lines in the last two segments as proprietary products. The power components segment is the legacy business and includes rectifiers, thyristors, Schottky diodes, as well as more advanced devices like MOSFETs and insulated gate bipolar transistors (IGBTs). These devices are utilized in various combinations, depending on the specific application within the power management circuits. In addition to these discrete component product sales, IRF earns royalty revenue by licensing its MOSFET technology to manufacturers all over the world. In fiscal 2004, the company received $42 million in royalty payments.
The second segment's product line combines these discrete power semiconductor components into an IC, chipset or multichip package. These application specific generic products shift the power management design responsibility to IRF from end customers. These products are used in computers, data networking equipment, telecommunication equipment, consumer electronics, industrial motor controls, and defense and aerospace equipment. The power systems segment integrates the power semiconductors with functional controlling logic into a standalone standardized module that specifically targets the automotive and industrial vertical market applications. Automotive electronics and industrial motor control designers utilize these specialized modules within their equipment, while avoiding the design burden. Specific automotive applications include starter/alternator motors, electronic power steering systems and fan controls, while industrial applications include high-end washers, refrigerators and other energy-efficient appliances. The company has been strategically transitioning from a pure discrete component provider into a more advanced IC or module designer that integrates key power management devices into more sophisticated standardized modules with greater functionality. This strategy has permitted the company to penetrate new markets with correspondingly greater top-line growth and higher margin potential, while relying less on the commodity-like component business.
Traditionally, the firm has manufactured the wafers, assembled and tested almost all the products in-house. However in 2003, IRF announced its intention of reorganizing production and shutting down some older facilities that manufactured commodity products. IRF has also been upgrading one of the idle fabrication lines, with a planned commercial production launch in July 2005. In July 2004, IRF completed the $41 million cash acquisition of specialty silicon epitaxial assets and IP (Intellectual Property) from Advanced Technology Materials, which is expected to lower the cost of production of some devices. Management announced in the September 2004 quarter, its intentions of divesting or discontinuing certain low-margin/low-growth business lines that had contributed $100 million in revenue. Subsequently, another $50 million in low margin business was added. Business lines that generate approximately $100 million of revenue will be divested, while business lines producing $50 million of sales will be discontinued. Through the March 2005 quarter, approximately $36 million of the $50 million in business lines have been discontinued.
Beginning in 2005, IRF will be reporting results based on its focus and non-focus areas. Focus area products are divided into the following categories Computing and Communications (C&C segment), which generated 33% of fiscal year 2005 revenue and grew 17.8% over fiscal 2004 Energy Saving Products (ESP segment), which generated 26% and grew 19.8% Aerospace and Defense (A&D segment), which contributed 11% and grew 19.0% and intellectual Property (IP), which generated 3% and declined 1.8%. Non-focus areas include non-aligned products (which the company is in the process of divesting) and commodity products. Non-aligned products comprised 9% of fiscal 2005 revenue and declined 2.2%, while commodity products accounted for the remaining 18% and declined
The channel distribution to OEM customers is composed of a direct sales staff that contributed 71% of fiscal 2005 revenue and distributors that accounted for the remaining 29%. No single customer contributed more than 10% of revenue in 2005. Competitors in the power components segment are Fairchild, Hitachi, Infineon, Mitsubishi, NEC, ON Semiconductor, Phillips, STMicroelectronics, Toshiba and Vishay-Siliconix. The major competitors in the other two segments include Analog Devices, Intersil, Linear Technology, Maxim, Semtech and Texas Instruments. The Asia/Pacific region, generating 44% of fiscal 2005 sales, was the largest contributor to revenue, while North America, and Europe contributed 31% and 22%, respectively. The remaining 3% contribution was derived from IP licensing royalties.