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International Rectifier 10-K 2005

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2005

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to ___________

Commission file number: 1-7935


INTERNATIONAL RECTIFIER CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

95-1528961

(State or other jurisdiction of

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

233 Kansas Street
El Segundo, CA 90245

(Address of principal executive offices) (zip code)

Registrant’s telephone number, including area code: (310) 726-8000


Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange on which registered

Common Stock, par value $1.00

The New York Stock Exchange

 

Pacific Exchange

 

Securities registered pursuant to Section 12(g) of the Act: None


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 reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  þ    No  

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.   _______

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2 of the Act). Yes  þ    No  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes      No  þ

The aggregate market value of the registrant’s voting Common Stock held by non-affiliates as of the last day of the registrant’s most recently completed second fiscal quarter was $2,868,354,140 (computed using the closing price of a share of Common Stock on December 31, 2004, reported by New York Stock Exchange).

There were 70,683,479 shares of the registrant’s Common Stock, par value $1.00 per share, outstanding on September 8, 2005.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement for the annual meeting of stockholders scheduled to be held on November 21, 2005, which proxy statement will be filed no later than 120 days after the close of the registrant’s fiscal year ended June 30, 2005, are incorporated by reference in Part III of this Annual Report on Form 10-K.

 




TABLE OF CONTENTS

Item

 

 

Page

 

 

PART I

 

 

 

1.

 

Business

 

1

 

2.

 

Properties

 

17

 

3.

 

Legal Proceedings

 

18

 

4.

 

Submission of Matters to a Vote of Security Holders

 

18

 

 

 

Additional Item. Executive Officers of the Registrant

 

19

 

 

 

PART II

 

 

 

5.

 

Market for the Registrants’ Common Equity and Related Stockholder Matters

 

20

 

6.

 

Selected Financial Data

 

21

 

7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

24

 

7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

51

 

8.

 

Financial Statements and Supplementary Data

 

54

 

9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

92

 

9A.

 

Controls and Procedures

 

92

 

9B.

 

Other Information

 

93

 

 

 

PART III

 

 

 

10.

 

Directors and Executive Officers of the Registrant

 

94

 

11.

 

Executive Compensation

 

94

 

12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

94

 

13.

 

Certain Relationships and Related Transactions

 

94

 

14.

 

Principal Accountant Fees and Services

 

94

 

 

 

PART IV

 

 

 

15.

 

Exhibits and Financial Statement Schedules

 

95

 

 

 

 




This Annual Report on Form 10-K contains statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include comments regarding the intent, belief or current expectations of the company and its management. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements. The materials presented 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. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Affect Future Results.” Unless required by law we undertake no obligation to publicly update or revise any forward-looking statements to reflect new information, future events or otherwise.

PART I

Item 1. Business

Introduction

We are a leading designer, manufacturer and marketer of power management products using power semiconductors. Power semiconductors process electricity into a form more usable by electrical products. Our products address the two core challenges of power management, power performance and power conservation, by increasing system efficiency, allowing more compact end products, improving features and functionality, increasing fuel efficiency, and extending battery life.

We focus on the power management requirements of specific applications and bring our comprehensive portfolio of products and technologies to better satisfy the needs of that application. We concentrate on markets including computers, communications networking, consumer electronics, energy-saving appliances, lighting, satellites, launch vehicles, aircraft and automotive diesel injection, where our comprehensive portfolio of technologies enable better, more competitive end products.

According to iSuppli, a leading industry source for market information, the market for power management semiconductors in calendar year 2004 was approximately $21 billion, growing to approximately $24 billion in calendar year 2005. Our products address approximately $15 billion or over 70 percent of this market. We have seen signs of recovery in our industry from what we believe was an inventory correction during first half of calendar year 2005. However, overall economic conditions can be uncertain and difficult to predict.

We believe current demand for our products is driven largely by the following:

·       Information Technology demand for increased speed and functionality

·       Consumer and Industrial demand for energy-efficiency

·       Automotive demand for increased fuel economy

·       Aerospace and Defense demand for advanced power management technology

We divide our products among three general product categories: Power Management ICs and Advanced Circuit Devices, Power Components and Power Systems. As of fiscal year ended June 30, 2005, we report our results in six segments that generally reflect the products’ end-markets and our decision making for our company about allocating resources, including the focus of research and development activities, and in assessing performance. We also generate revenues by licensing our intellectual property to third parties. We summarize our six reporting segments into two groups, Focus Products and Non-Focus Products. Our Focus Product segments are Computing and Communications, Energy-Saving Products,  

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Aerospace and Defense, and Intellectual Property. Our Non-Focus Product segments are Commodity Products and Non-Aligned Products.

We achieved consolidated revenues of $1.17 billion for the fiscal year ended June 30, 2005, and increased our gross margin to 43.5 percent from 38.8 percent for the prior fiscal year ended. Revenues from our Focus Product segments increased to 73 percent of our consolidated revenues for the fiscal year ended June 30, 2005, from 69 percent for the prior fiscal year ended. Gross profit margin for our Focus Product segments during the same period grew to 50.6 percent from 46.5 percent for the prior fiscal year ended. In our Non-Focus Product segments, revenues decreased to 27 percent of our consolidated revenues for the fiscal year ended June 30, 2005, from 31 percent in the prior fiscal year ended, while gross profit margin during the same period increased to 24.1 percent from 21.7 percent for the prior fiscal year ended.

We market our products through direct sales staff, representatives and distributors. Our customers include original equipment manufacturers (“OEMs”), distributors and subcontract manufacturers. For our customers in our Focus Product segments, we primarily use direct sales staff and representatives. In line with this strategy, we have added a complement of field application engineers and technical sales support staff to better serve the customers’ needs. For customers in the Commodity Product segment, we primarily sell through distributors, taking advantage of cross-selling opportunities with our other product families. No single OEM customer, distributor or subcontract manufacturer accounted for more than ten percent of our consolidated revenue for the fiscal year ended June 30, 2005.

We conduct research and development activities to improve the performance and cost effectiveness of our product offerings in target applications. Our research and development program focuses on Power Management ICs, Advanced Circuit Devices and Power Systems and the advancement and diversification of our HEXFET® power MOSFET and IGBT product lines within our Focus Product segments. Our program places increasing emphasis on the development of chipsets and system-level solutions that improve overall system performance and cost, and helps customers accelerate market introduction of their products. In the fiscal years ended June 30, 2005, 2004 and 2003, we spent $104.9 million, $92.2 million and $78.9 million, respectively, on research and development activities.

We fabricate most of our chips in facilities designed to address the specific requirements of power semiconductors. We believe our wafer fabrication costs are among the lowest in the industry. We have wafer fabrication and/or assembly production facilities in California, Massachusetts, Mexico, the United Kingdom, Italy, India and China. We also use third-party foundries and assemblers that provide us with capacity flexibility. We have been ramping up our most advanced manufacturing facility in Newport, Wales (United Kingdom), acquired in fiscal 2002. We plan to utilize this fabrication capacity almost exclusively for our Focus Products, which offers us the much needed capacity over the next several years to support our growth.

We are also continuing with our plan to review products and product lines not aligned with our long-term objectives to increase our overall gross margins over 50 percent. As of fiscal year ended June 30, 2005, we have discontinued business opportunities of over $100 million in annualized revenues since the beginning of fiscal year 2004, across our various segments. Within our Non-Focus Products, specifically our Non-Aligned Product segment, we have targeted an additional $110 million for realignment, whether by changing the model for how we participate in the business, or by divestiture or other strategic transactions, such as joint venture or partnership. We plan to support our Non-Focus Products to the extent we believe appropriate, to manage, maintain or increase their value in line with our long-term goals for those segments. (Refer to “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Fiscal 2005 Compared with Fiscal 2004” and Note 7 to Consolidated Financial Statements, “Segment and Geographic Information”, for further discussions about our business segments.)

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Product Categories and Segments

We use our technology, comprehensive experience in power management, and low-cost manufacturing platforms to offer what we believe is one of the industry’s most advanced and competitive lines of power management products. Our products are divided among three general product categories. These products may be sold across one or more reportable segments:

·       Power Management Integrated Circuits and Advanced Circuit Devices.   Our Power Management Integrated Circuits, or Power Management ICs, are analog, mixed signal, and digital semiconductors that integrate logic and/or power management functions on the same chip to optimize system performance. Advanced Circuit Devices are chipsets, multi-chip modules and other advanced-performance devices that generally address power management requirements in demanding applications, and which we do not consider to be commodity in nature. Our Power Management ICs and Advanced Circuit Devices provide application-specific power management solutions for computers, servers and routers, consumer electronics, energy-saving appliances and other motor-control applications, aircraft and satellites, defense electronic systems, wireless and wireline communication devices and certain automotive applications.

·       Power Components.   Power Components are discrete devices used in general power management applications. These include metal oxide semiconductor field effect transistors (MOSFETs) and insulated gate bipolar transistors (IGBTs), regulators, rectifiers, diodes, thyristors and interfaces. Power MOSFETs and IGBTs rapidly and efficiently switch electricity on and off in order to supply power in a form that can be formatted to the specific requirements of a circuit. Our Power Components are used in virtually all our end markets.

·       Power Systems.   Power Systems combine power semiconductors with other power management components in modules that improve power efficiency, provide a cost-effective alternative to custom analog designs and enable customers to introduce new products more quickly. We supply Power Systems as modules for automotive electronics (including electric fan control, electric power steering and integrated starter/alternator motors), other motor control applications (including industrial refrigeration and air conditioning), and commercial and military aircraft.

We report in six segments that generally reflect our products’ end-markets.   Our Chief Operating Decision Maker (“CODM”) for financial accounting purposes is our Chief Executive Officer who reviews the revenues and gross margin results for each of these segments in making decisions about allocating resources, including the focus of research and development activities, and assessing performance. We do not allocate assets, sales and marketing, information systems, finance and administrative costs to the operating segments, as these are not meaningful statistics to the CODM in making resource allocation decisions or in evaluating performance of the operating segments.

We further summarize our segments into two groups, Focus Products and Non-Focus Products, to reflect our strategic goals and the allocation of our critical resources.

Our Focus Product segments are:

·       Computing and Communications (“C&C”)—The Computing and Communication segment is comprised of our Power Management ICs, Advanced Circuit Devices, including iPowir™ multi-chip modules and DirectFET™ solutions, and Power Components (primarily HEXFET Power Components) that address servers and high-end desktops, notebooks, communications networking, and digitally-oriented consumer products like game consoles. Our C&C segment products are also used in digital television, liquid crystal displays (“LCDs”), portable handheld devices and cellular phones, and are primarily used for DC-DC converter type applications.

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·       Energy-Saving Products (“ESP”)—The Energy-Saving Product segment is comprised of our Power Management ICs, Advanced Circuit Devices and Power Components (primarily HEXFET and IGBT Power Components) for variable speed motion control in energy-saving appliances (such as washing machines, refrigerators and air conditioners), industrial systems (such as fans, pumps and compressors), advanced lighting products (including fluorescent lamps, high intensity discharge (“HID”) lamps, cold cathode fluorescent (“CCFL”) tubes and light emitting diodes (“LED”) lighting), advanced automotive solutions (primarily diesel injection, electric-gasoline hybrid and electric power steering systems), and consumer applications (for example, plasma TVs and digital-audio units).

·       Aerospace and Defense (“A&D”)—The Aerospace and Defense segment is comprised of advanced power management solutions, such as radiation-hardened power management modules, radiation-hardened Power Components, and other high-reliability Power Components that address power management requirements in satellites, launch vehicles, aircrafts, ships, submarines and other defense and high-reliability applications.

·       Intellectual Property (“IP”)—The Intellectual Property segment reports our business of licensing our intellectual property to third parties. Our IP income has been and is largely dependent on the continued enforceability and validity of our licensed MOSFET patents, which will generally reach their maturity in a few years. Aside from our MOSFET technologies, our intellectual property strategy has been to use our intellectual property primarily for the design and development of value-added families of products. In our IP segment, we concentrate our efforts on the licensing of technologies or fields of use that have application beyond our product groups or which no longer align with our long-term business strategies for our product groups. We also target certain technologies for licensing that we believe help establish our product platforms and structures as industry standards and, thereby enhance the growth of certain products.

Our Non-Focus Product segments are:

·       Commodity Products (“CP”)—The Commodity Product segment is comprised primarily of older-generation Power Components that are sold with margins generally below our strategic targets and are typically commodity in nature. These products have widespread use throughout the power management products industry and are often complementary to many of our Focus Product offerings or allow us to provide a full range of customer or application offerings. We often offer these products to take advantage of cross-selling opportunities for our other product families. These products may help to increase our manufacturing economies of scale.

·       Non-Aligned Products (“NAP”)—The Non-Aligned Product segment includes businesses, product lines or products we are targeting for realignment, whether by changing the business model for how we participate in the business, or by divestiture or other strategic transactions, such as joint venture or partnership. We plan to support our Non-Focus Products to the extent we believe appropriate, to manage, maintain or increase their value in line with our long-term goals for those segments. Currently, product lines reported in this segment are certain modules, rectifiers, diodes and thyristors used in automotive, industrial, welding and motor control applications.

Industry Overview

Power semiconductors convert power from an electrical outlet, a battery or an alternator running off an internal combustion engine into more efficient and useful power for a wide range of electrical and electronic systems and equipment. The more sophisticated the end product, the greater the need for specially-formatted, finely-regulated power. The importance of power semiconductor technology rises with the increasing complexity of electronic products and the proliferation of electronic features in information technology, industrial, consumer, aerospace and defense and automotive products. According to iSuppli, a

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leading industry source for market information, the market for power management semiconductors in calendar year 2004 was approximately $21 billion, growing to approximately $24 billion in calendar year 2005. Our Power Management ICs, Advanced Circuit Devices, Power Components and Power Systems address approximately $15 billion or over 70 percent of this market. We have seen signs of recovery from what we believe was an inventory correction during first half of calendar year 2005. However, economic conditions can be uncertain and difficult to predict.

Historically, demand for power semiconductors has displayed cyclical characteristics. Current demand is driven largely by the following:

·       Information Technology (“IT”) Demand for Increased Speed and Functionality.   Product development roadmaps for the IT industry call for continued increases in speed and functionality, and ever-shrinking form factors driving power density in computers, servers, consumer electronics and a variety of leading-edge electronic devices and equipment. The need for greater power drives up current levels of processing and operating frequencies, and each new generation of IT relies more heavily on, and places a higher value on, efficient, precise power management. The development of WiMAX and the expected transition to more wideband technologies is requiring significant enhancements in power management technology. As the worlds of computing, communications and consumer electronics converge, powerful devices and applications will emerge that will place increased data management requirements on servers, storage systems, routers and datacom equipment. These changes will demand higher power performance levels.

·       Consumer and Industrial Demand for Energy-Efficiency.   Worldwide demand for energy-saving appliances, industrial motors, efficient lighting and consumer products like home entertainment displays and audio equipment continues to rise. Whether the end products are sold to customers in an industrialized nation with stringent environmental standards or a developing nation with a modest energy budget, advanced power management technology provides solutions to fulfill the need for energy efficient consumer and industrial products.

·       Automotive Demand for Increased Fuel Economy.   Current oil prices are driving consumer demand and regulatory mandates for increased automotive fuel efficiency. In many instances the need for fuel efficiency is resulting in fundamental redesigns of automotive systems, where power features, such as electric power steering, common rail diesel injection and electric-gasoline hybrid powertrain, are used to augment or replace traditional, less efficient systems. The need to meet increased fuel efficiency is prompting a fundamental re-design of automotive electrical systems, which is shaped in part by advancements in power management technology.

·       Aerospace and Defense Demand for Advanced Power Management Technology.   In the aerospace and defense industries, power management technology is critical to meeting the rigorous space, weight and reliability requirements of highly-demanding applications and harsh environments. A renewed commitment to security drives some of the demand in this segment through growth in defense applications. In addition, aircraft designs are converting from hydraulic control systems to electronic control systems, which use a higher content of power management products, and aerospace systems designers are constantly striving for higher efficiency power conversion solutions.

Strategy

We continue to build on our industry leadership in power management technology to develop certain key products based on our proprietary technology. To differentiate ourselves, we focus on the power management requirements of a specific application and bring our comprehensive portfolio of products and technologies to advance the power management performance of that application. Our products are diversified within the power management field and serve various applications, such as computers,

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communications networking, consumer electronics, energy-saving appliances, lighting, satellites, launch vehicles, aircraft and automotive diesel injection.

We continue our Focus Products strategy, which involves developing value-added products, such as high performance Power Management ICs, taking advantage of cross-selling opportunities for our various product families, and increasing the number of new technical sales professionals and field application engineers worldwide. We implement our strategy through the following initiatives:

Adding Value in High Growth Markets.   We concentrate our efforts on power management products and believe this focus has helped us develop the most advanced power management products and solutions. For example, our Power Management ICs are used in power management for portable electronics, next-generation plasma HDTV displays and Intel’s and Advanced Micro Devices’ most advanced microprocessors. We are also targeting a wide range of applications that have not historically utilized power management technologies with our Power Management ICs and Power Components, including washing machines, refrigerators, air conditioners and other appliances from such market leaders as Electrolux, LG, Samsung, Sanyo and Whirlpool.

Leveraging Our Leading-Edge Technology.   Our leading-edge technology enables us to set performance and architecture standards for power electronics in targeted applications. Our research and development program focuses on Power Management ICs, Advanced Circuit Devices and Power Systems and the advancement and diversification of our HEXFET, power MOSFET and IGBT product lines. During the three years ended June 30, 2005, we spent $275.9 million on research and development. We have a growing portfolio of approximately 400 U.S. patents and approximately 800 patent applications pending worldwide (see “Intellectual Property” below). We continue to commit to research and development to generate new patents and other intellectual property and concentrate on incorporating our technologies into our Focus Products. In the fiscal years ended June 30, 2005, 2004 and 2003, licenses under our patents generated royalty income of $41.2 million, $41.9 million and $42.0 million, respectively. Our licensed MOSFET patents expire between 2005 and 2010, with the broadest remaining in effect until 2007 and 2008.

We now report our royalties from all intellectual property licensing under our IP segment. Our income has been and is largely dependent on the continued enforceability and validity of our licensed MOSFET patents, which will be generally reaching their maturity in a few years. Our licensed MOSFET patents expire between 2005 and 2010, with the broadest remaining in effect until 2007 and 2008. Aside from our MOSFET technologies, our intellectual property strategy has been to use our intellectual property primarily for the design and development of a value-added family of products.  In our IP segment, we concentrate our efforts on the licensing of technologies or fields of use that have application beyond our product groups or which no longer align with our long-term business strategies for our product groups. We also target certain technologies for licensing that we believe help establish our product platforms and structures as industry standards and, thereby, enhance the growth of certain products. Royalties from our MOSFET patents have been and are largely dependent on the continued enforceability and validity of our licensed MOSFET patents, the ability of our competitors to design around our licensed MOSFET technology or to develop competing technologies and general market conditions. The continuation of such royalties is subject to a number of risks (see “Item 7, Management’s Discussion and Analysis of Financial Condition—Factors that May Affect Future Results—Our ongoing protection and reliance on our intellectual property assets expose us to material risks”).

Extending Leadership in Power Components.   We pioneered a fundamental technology for power MOSFETs and estimate that the majority of the world’s power MOSFETs are produced by us or use our patented technology. Over the last two years, we invested aggressively to advance trench, planar and other process technologies. These investments produced what we believe are the most efficient power MOSFET components in the marketplace. Our leadership position in Power Components provides us with a platform for continued expansion in value-added growth markets.

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Capitalizing on Relationships with Market Leaders.   Many industry leaders look to us for products and programs that address their most challenging power management needs. These relationships put us at the forefront of developing products for new trends in the marketplace.  Our strategy of driving significant content adoption with these customers into application specific areas requires a large, well trained technical sales team. We have increased the number of technical product sales professionals and field application engineers worldwide, to offer technological design expertise and high quality customer service. This comprehensive sales and engineering support includes design-based consulting services, Internet service applications, electronic order entry and just-in-time delivery.

Focusing on Manufacturing Efficiency.   We fabricate most of our chips in facilities designed to address the specific requirements of power semiconductors. We believe our wafer fabrication costs are among the lowest in the industry. We have wafer fabrication and/or assembly production facilities in California, Massachusetts, Mexico, the United Kingdom, Italy, India and China. We also use third-party foundries and assemblers that provides us with capacity flexibility. We have been ramping up our most advanced manufacturing facility in Newport, Wales (United Kingdom), acquired in fiscal 2002. We expect this facility to support our growth over the next several years with first production wafers shipped in the fiscal quarter ended December 31, 2005.

Manufacturing Related Acquisition.   In July 2004, we acquired the specialty silicon epitaxial services business from Advanced Technology Materials, Inc. for $39.6 million in cash in order to lower production costs and to gain certain key intellectual property for epitaxial silicon substrate manufacturing (see Note 13, “Acquisitions” of Notes to Consolidated Financial Statements).

Restructuring Update.   In the second quarter of fiscal 2003, we announced certain restructuring initiatives. Our goal was to position ourselves to better-fit market conditions, de-emphasize our commodity business and accelerate the move to our proprietary products, which refer to our Power Management ICs, Advanced Circuit Devices and Power Systems. The restructuring plan included consolidating and closing several older facilities and legacy operations. We also planned to lower overhead costs across our support organizations. We have substantially completed these restructuring activities as of June 30, 2005. We expect to complete the remaining activities, primarily the closing of a fabrication line at El Segundo, California and an assembly line at Krefeld, Germany by fiscal year end 2006 or sooner. As of the fourth quarter of fiscal year 2005, we have realized annualized savings of about $80 million from our restructuring activities (see also “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Fiscal 2005 Compared with Fiscal 2004—Impairment of Assets, Restructuring and Severance Charges”).

Focusing on Divesting or Changing Our Business Model for Lower Margin Product Lines.   We review our business for product lines or products that we have determined in their current form or substance are not aligned with our long-term strategic objectives, primarily for gross margin performance, and/or for which our fundamental business model by which we derive value is changing. In some instances we believe it is in our best interests to divest or discontinue the business. In other instances, we may elect to participate in the business with a different structure, such as joint ventures and partnerships, to allow for long-term business growth. We have discontinued over $100 million in annualized revenues since the beginning of fiscal year 2004, across our various segments. Within our Non-Focus Products, specifically our Non-Aligned Product segment we have targeted an additional $110 million for realignment, whether by changing the model for how we participate in the business, or by divestiture or other strategic transactions, such as joint venture or partnership. We plan to support our Non-Focus Product segments to the extent we believe appropriate, to manage, maintain or increase their value in line with our long-term goals for those segments. (Refer to “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Fiscal 2005 Compared with Fiscal 2004” and Note 7 to Consolidated Financial Statements, “Segment and Geographic Information”, for further discussions about our business segments.)

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Products and Applications

Our products process electrical power into a form that is more readily usable by electric products. We believe that our full complement of power management technology represents a competitive advantage, enabling us to provide customers with solutions that shorten their overall product development cycle time. Our products are broadly divided among three product categories: Power Management ICs and Advanced Circuit Devices, Power Components and Power Systems.

Power Management ICs and Advanced Circuit Devices

Our Power Management ICs are semiconductors that often integrate several system functions including reference, logic, control, supervision, protection and monitoring on the same chip. These devices optimize the performance of circuits that often include power MOSFETs and IGBTs and allow our customers to simplify circuit design and assembly, improve reliability, and reduce overall system size and cost. The ability of these ICs to sense and respond to circuit conditions makes their performance superior to discrete components. Our ICs often use our proprietary power MOSFET technology. We have obtained substantial patent protection for our ICs and have additional patent applications pending.

Advanced Circuit Devices are chipsets, multi-chip modules and other advanced performance devices that address power management requirements in demanding applications. These products are value-added or provided under reduced competition due to their technological content or our customer relationship.

Increased complexity in computers, routers, servers and other devices require increased levels of power and more effective heat dissipation, making power management one of the most critical tasks. IT applications are trending to lower voltages and higher current levels, which require greater efficiency and more complex power management to meet speed and performance demands. Advanced consumer electronics such as PDP televisions and game consoles also require more efficient and complex power management.

Motors consume approximately half of the world’s electricity. New variable-speed motors equipped with our Power Management ICs and Advanced Circuit Devices increase energy efficiency and performance in a wide range of household, commercial and industrial applications. For example, while most refrigerator motors can operate only at full speed, a refrigerator equipped with variable-speed motor can run at the exact speed needed to maintain the required temperature. Our Power Management ICs and Advanced Circuit Devices designed for variable-speed motors reduce electricity consumption, simplify product design, improve product performance and reduce overall costs. We have achieved multiple sole-source design wins from leading worldwide manufacturers in high-end washing machines, refrigerators and other energy-saving appliances.

We continue to invest aggressively in our Power Management IC technologies and key trench, planar and other process technologies. These investments have resulted in what we believe are the most efficient Power Management ICs and Advance Circuit Devices. Among other attributes, we believe these product offerings set the industry standard for performance and cost-efficiency in high-volume consumer electronics applications.

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Power Components

Switching Products.   Power MOSFETs and IGBTs rapidly and efficiently switch electricity on and off in order to supply power in a form that can be formatted to the specific requirements of a circuit.

Through our HEXFET product line, we are the market leader in power MOSFETs according to iSuppli market research firm. Our emphasis on quality control and reliability has helped us maintain market acceptance and brand recognition of our HEXFET line of products. We pioneered the fundamental planar technology that set the industry standard for power MOSFETs.

MOSFETs are critical in a wide variety of electric products. Communications applications include cellular phones, telephone networks and modems. Computer and 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. Automobile applications include anti-lock braking systems, fuel injection systems, power accessories and air bags. Industrial applications include automated production equipment, instrumentation and test equipment. Aerospace and defense applications include communications satellites and satellite command-and-control systems.

IGBTs typically perform the switch function in industrial applications that require higher current and voltage than power MOSFETs can handle efficiently. 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 we believe hybrid and electric vehicles may require large quantities of IGBTs. Our IGBT technology is closely related to our power MOSFET technology. We believe our patents on fundamental power MOSFET technology also apply to IGBTs.

Regulators, Rectifiers, Diodes, Thyristors and Interfaces.   We manufacture a broad line of regulators, rectifiers, diodes, thyristors and interfaces. These products, which also condition electrical power to make it more efficient and usable, are used in industrial end products that require power-handling capability from one amp to 5,000 amps and from 20 volts to 5,000 volts. Applications include motor and lighting controls, welding equipment, forklifts, machine tools, induction heating, locomotives, motor-driven production lines, smelting equipment and power supplies.

Our Schottky diodes and fast-recovery diodes serve the output rectification function of power conversion. A diode is a discrete device that conducts current in one direction. A Schottky diode is an ultra-fast diode used in high-frequency, low-voltage circuits. A fast-recovery diode is a diode suited to applications above 200 volts where high switching speed is desirable. Schottky diodes are used with power MOSFETs in high-frequency applications such as computers and peripherals. Our HEXFRED® fast-recovery diodes are used with IGBTs in higher-current, lower-frequency applications such as motor controls.

Power Systems

Power Systems combine power semiconductors with other power management components in specialized modules that improve power efficiency and simplify circuit design. Our Power Systems are used in DC-DC converters, automotive electronics and motor control. Our products provide a cost-effective alternative to custom analog designs.

Tougher standards for fuel economy, emissions and safety and the proliferation of power features in automobiles are driving the adoption of more complex power electronics. Our Power Systems can help reconcile conflicting demands for better fuel mileage and more power features by replacing traditional hydraulic and belt-driven applications with electronic systems. In addition, electrically operated automotive

9




systems improve reliability and maintenance. Our Power Systems are designed into integrated starter/alternator motors, electric power steering systems, fuel pumps, water pumps and fan controls.

Manufacturing

Semiconductor manufacturing involves two phases of production: wafer fabrication and assembly. Wafer fabrication requires 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, termed “die” or “chips”, on each wafer. Assembly is the sequence of production steps that divide the wafer into individual chips and enclose the chips in structures, termed “packages”, which make them usable in a circuit. Power semiconductors generally use process technology and equipment already proven in the manufacturing of integrated circuits.

We have manufacturing and/or assembly facilities in California, Massachusetts, Mexico, the United Kingdom, Italy, India and China. In addition, we have equipment at, or manufacturing supply agreements with, subcontractors located in China, the Czech Republic, Germany, Korea, Malaysia, Philippines, Taiwan, Thailand and the United States.

We have substantially completed our restructuring activities previously announced in December 2002, to de-emphasize our commodity business and accelerate the move to our proprietary products, which refer to our Power Management ICs, Advanced Circuit Devices and Power Systems (see “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations”). As part of this strategy, we are consolidating and closing certain manufacturing sites, upgrading equipment and processes in designated facilities and discontinuing production in a number of others that cannot support more advance technology platforms or products within our Focus Product segments. The majority of our capital spending were at our most advanced wafer fabrication facility, located in Newport, Wales. This facility provides wafer fabrication capacity for mixed-signal, analog and MOSFET processes. We have a MOSFET wafer fabrication facility in Temecula, California. We have a high-voltage Power Management IC wafer fabrication facility in El Segundo, California, which is targeted to be moved to Newport, Wales by the end of fiscal year end 2006. Assembly operations for products used in the aerospace and defense applications, which include high-reliability Power Components, are located in Leominster, Massachusetts, Santa Clara, California, and Tijuana, Mexico. We manufacture substantially all of our Schottky diodes, high-power rectifiers and thyristors at our Torino, Italy facility. Plants that assemble power MOSFETs and other products are located overseas in facilities we own or in subcontracted facilities. Our high-volume assembly lines for power MOSFETs, IGBTs and diodes are located in our facility in Tijuana, Mexico. We use production facilities in Swansea, Wales and Krefeld, Germany to manufacture and assemble automotive modules. As part of our restructuring activities, we have moved most manufacturing activities from Krefeld, Germany to our Swansea, Wales and Tijuana, Mexico facilities. In a duty-free zone in India, we have an assembly facility for rectifiers and thyristors. The Mesa, Arizona facility we acquired at the beginning of this fiscal year provides specialty silicon epitaxial services. For our manufacturing facilities by reportable segment, refer to “Item 2, Properties” below.

At fiscal year ended June 30, 2005, we operated in the low 90s percent of our worldwide semiconductor fabrication and assembly/module manufacturing capacities, without taking into account subcontract or foundry capacity. Demand for our Focus Products contributed to the high levels of capacity utilization. In order to continue to meet the high demand for our Focus Products, we plan to accelerate our capital expansion plans. As a consequence we anticipate nearly 70 percent of fiscal year 2006’s capital expenditures will be in the first half of the year. Included in this plan is the ramp up of our 200mm wafer fabrication manufacturing facility in Newport, Wales facility. This facility will provide our most advanced production capabilities. We plan to utilize this fabrication capacity almost exclusively for Focus Products. This facility offers us the much needed capacity over the next several years to support our growth.

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We believe our fabrication costs are among the lowest in the industry. Through our Focus Products strategy, including our restructuring activities as described above, we have improved our gross margin to 43.5 percent for the fiscal year ended June 30, 2005, from 38.8 percent in the prior fiscal year. Focus Products accounted for 73 percent and 69 percent of our consolidated revenues in fiscal years ended June 30, 2005 and June 30, 2004, respectively. Gross margin for our Focus Products increased to 50.6 percent for the fiscal year ended June 30, 2005 from 46.5 percent for the prior fiscal year ended June 30, 2004.

Marketing, Sales and Distribution

We market our products through direct sales staff, representatives and distributors. For our customers in our Focus Product segments, we primarily use direct sales staff and representatives. In line with this strategy, we have added a complement of field application engineers and technical sales support staff to better serve the customers’ needs. For customers in the Commodity Product segment, we primarily sell through distributors, taking advantage of cross-selling opportunities with our other product families. For the fiscal years ended June 30, 2005, 2004 and 2003, direct sales to original equipment manufacturers (“OEMs”) were 72 percent, 71 percent and 69 percent, respectively, of consolidated product sales, which exclude royalty income reported under our Intellectual Property segment.

For the fiscal year ended June 30, 2005, our product sales by region, based on the location of the customer, were 29 percent from North America, 23 percent from Europe and 48 percent from Asia, which includes Japan and Asia Pacific. This has remained fairly consistent with the prior fiscal year ended June 30, 2004, where sales by region were 28 percent, 24 percent and 48 percent for North America, Europe and Asia, respectively. Our domestic direct sales force is organized into five regional sales zones. In Europe, our products are sold through our own sales force as well as through independent sales agents and distributors. Our European sales and representative offices are in Austria, the Czech Republic, Denmark, Finland, France, Germany, Hungary, Italy, Spain, Sweden, Switzerland, Russia and the United Kingdom. In Asia, we have sales representative or liaison offices in China, Hong Kong, India, Japan, the Philippines, Singapore, South Korea and Taiwan. We also have sales representative or liaison offices in Australia, Mexico and New Zealand.

For financial information about the results for our geographic areas for each of the last three fiscal years, refer to Note 7, “Segment and Geographic Information” of Notes to Consolidated Financial Statements. For the risks attendant to our foreign operations, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors that may affect Future Results—Our international operations expose us to material risks.’’

Because many applications require products from several product groups, we have organized our product development and marketing efforts by sector and application, rather than product type. Those general sectors are now reported within our defined segments. In addition, our staff of application engineers provides customers with technical advice and support regarding the use of our products. We have increased the number of engineering offices to help support our Focus Products. We believe the depth of our power management product line enhances our competitive position in the overall power semiconductor market.

Customers

Our devices are incorporated in subsystems and end products manufactured by other companies. Our customers include OEMs, distributors and subcontract manufacturers. No single OEM customer, distributor or subcontract manufacturer accounted for more than ten percent of our consolidated revenue for the fiscal year ended June 30, 2005. The majority of our products in our Focus Product segments, including those in the C&C, ESP and A&D segments, are sold directly to OEM customers. However, three

11




distributors included at the table below accounted for approximately 39 percent of our C&C revenues for the fiscal year ended June 30, 2005. One of these distributors accounted for approximately 12 percent of our CP revenues for the fiscal year ended June 30, 2005. One of the OEM customers included at the table below accounted for approximately 27 percent of our NAP revenues for the fiscal year ended June 30, 2005. No single OEM customer, distributor or subcontract manufacturer accounted for more than ten percent of our other reported segments.

The following table lists some of our major customers by revenues, by business segment and end-market for fiscal year 2005:

Business Segment(s)*

 

End Markets

 

Customers

C&C, CP

 

Information Technology (Communications)

 

Alcatel, Astec, Artesyn Technologies, Cisco, Delta, Lucent, Motorola, Nortel and Power-One

C&C, CP

 

Information Technology (Computing)

 

Apple, Dell, Fujitsu, HPQ, IBM, Intel, NEC and Sony

C&C, ESP, CP

 

Consumer

 

BSH, Electrolux, Hitachi, JVC, Matsushita, Pioneer, Samsung, Sanyo, Toshiba-Carrier and Whirlpool

ESP, CP, NAP

 

Industrial

 

American Power Conversion, Danfoss, Emerson and Grundfos

ESP, CP, NAP

 

Automotive

 

Bosch, Daimler-Chrysler, Delphi, Nagares, SiemensVDO, Temic, TRW, Valeo and Visteon

A&D

 

Aerospace and Defense

 

Astrium, BAE, Boeing, Honeywell, ITT, L3 Communications, Lockheed-Martin and Northrop-Grumman

Business Segment(s)*:

 

Distributors and Subcontract Manufacturers (based on revenues for fiscal year 2005):

C&C, ESP, CP, NAP

 

Distributors

 

Arrow Electronics, Avnet, Future Electronics, Lintek, Weikeng and Zenitron

C&C, ESP, CP, NAP

 

Subcontract Manufacturers

 

Celestica, Flextronics, Jabil, Sanmina-SCI and Solectron


 

*

C&C:

Computing and Communications

 

ESP:

Energy-Saving Products

 

A&D:

Aerospace and Defense

 

CP:

Commodity Products

 

NAP:

Non-Aligned Products

 

Competition

We encounter differing degrees of competition for our 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 product design changes. Several of our competitors are larger companies with greater financial resources. We believe that we are differentiated from our competitors by our comprehensive line of power management products and our ability to combine these products into compact, cost-effective packages and system-level solutions. Our products compete with products manufactured by others on the basis of enabling capability, performance, reliability, quality, price, delivery time to customer and service (including technical advice and support). Our major competitors in Power Management ICs and Advanced Circuit Devices include Intersil, Linear Technology, Maxim Integrated Products, Semtech and Texas Instruments. Our major competitors in Power Components include Fairchild Semiconductor, Infineon Technologies, Mitsubishi, ON Semiconductor, Philips, Renesas, STMicroelectronics, Toshiba and Vishay-Siliconix. Aside from typical industry competitors, our Power Systems products often offer our customers an improved alternative to their internal manufacturing systems internally.

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Our major competitors by business segment are as follows:

Business Segment

 

Competitors

Computing and Communications

 

Fairchild Semiconductor, Infineon Technologies, Intersil, Linear

 

 

Technology, Maxim Integrated Products, National Semiconductor, ON Semiconductor, Philips, Renesas, Semtech, STMicroelectronics, Texas Instruments, Vishay-Siliconix, and Volterra

Energy-Saving Products

 

Fairchild, Infineon Technologies, Intersil, Mitsubishi, National Semiconductor, Philips, Renesas, STMicroelectronics, Shindengen, Texas Instruments, Toshiba and Vishay-Siliconix

Aerospace and Defense

 

Babcock, Interpoint, Microsemi, Modular Devices, MS Kennedy, Semelab, Sensitron, VPT

Commodity Products

 

Fairchild Semiconductor, Infineon Technologies, Matsushita, Philips, Renesas, STMicroelectronics, Toshiba and Vishay-Siliconix

Non-Aligned Products

 

Mitsubishi, STMicroelectronics and Toshiba

 

Backlog

As of June 30, 2005, our backlog of orders was $393.7 million compared to $403.3 million as of June 30, 2004. The backlog for our C&C and CP segments declined, which was partially offset by increase in backlog for our ESP and A&D segments. Backlog is comprised of purchase orders and customer forecast commitments scheduled to be shipped within the following twelve months. Increasingly, major customers are operating their businesses with shorter lead-times and are placing their orders at shorter intervals, which tend to reduce backlog relative to future revenue. Given adequate notice, we usually allow customers to cancel purchase orders without penalty. The amount of backlog to be shipped during any period is dependent on various factors and can vary significantly from month to month. Accordingly, backlog is not necessarily indicative of sales for any future period.

Backlog by business segment as of fiscal years ended June 30, 2005 and 2004 is as follows (in thousands):

 

 

2005

 

2004

 

Computing and Communications

 

$

124,867

 

$

145,343

 

Energy-Saving Products

 

115,905

 

101,205

 

Aerospace and Defense

 

51,106

 

42,009

 

Focus Products Backlog

 

291,878

 

288,557

 

Commodity Products

 

58,289

 

74,555

 

Non-Aligned Products

 

43,486

 

40,146

 

Non-Focus Products Backlog

 

101,775

 

114,701

 

Total Backlog, June 30, 2005

 

$

393,653

 

$

403,258

 

 

Research and Development

We conduct research and development activities to improve the performance and cost effectiveness of our product offerings in target applications. Our research and development program focuses on Power Management ICs, Advanced Circuit Devices and Power Systems and the advancement and diversification of our HEXFET® power MOSFET and IGBT product lines within our Focus Product segments. Our program places increasing emphasis on the development of chipsets and system-level solutions that improve overall system performance and cost, and helps customers accelerate market introduction of their products.

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In the fiscal years ended June 30, 2005, 2004 and 2003, we spent $104.9 million, $92.2 million and $78.9 million, respectively, on research and development activities. We have increased our research and development spending by 122 percent over the last five years, a period that included the steepest downturn in the history of the semiconductor industry.

Our design centers are located throughout the world, including the United States, Canada, the United Kingdom, Denmark, Italy, France, Germany and Singapore. During fiscal year 2005, we continued to introduce advanced power management solutions that drive high performance computing and save energy across our served markets. New products included: a) our µPFC IC family of products helping computing, consumer electronics and home appliances meet energy-efficiency standards, b) an expansion of our iMOTION integrated design platform for energy-saving appliances, c) a series of high voltage IGBT control ICs with integrated protection features for a range of applications from motor drive to SMPS power supplies, d) a broadening of our iPOWIR, DirectFET, and XPhase families critical in high performance computing applications, e) a universal active ORing IC for redundant Power Systems common to telecommunications infrastructure, and f) two new classes of radiation-hardened MOSFET platforms, R6 and R7, and a family of efficient radiation-hardened DC-DC converter platforms for space applications.

Intellectual Property

We continue to make significant investments in developing and protecting our intellectual property. In the past fiscal year, we added over 100 patents worldwide. We have over 400 issued unexpired U.S. patents and approximately 380 U.S. patent applications pending (including approximately 100 provisional applications). Our power MOSFET patents expire between 2005 and 2010, with the broadest remaining in effect until 2007 and 2008. In addition, we have 210 issued foreign patents and approximately 460 foreign patent applications pending in a number of countries (including applications filed under treaty). We are also licensed to use certain patents owned by others.  We have several registered trademarks in the United States and abroad, including the trademark HEXFET®. We believe that our intellectual property contributes to our competitive advantage.

We are committed to enforcing our patent rights, including litigation if necessary. Through successful enforcement of our patents over the past decade, we have entered into more than 20 license agreements, generated royalty income, and received substantial payments in settlement of litigation. Our broadest power MOSFET patents were subject to, and have successfully emerged from, reexamination by the United States Patent and Trademark Office. Our IP segment reports our revenues from licensing our intellectual property to third parties.

We currently have license agreements with the majority of power MOSFET manufacturers in the United States and abroad. In the fiscal years ended June 30, 2005, 2004 and 2003, we derived $41.2 million, $41.9 million and $42.0 million of royalty revenues from license agreements, respectively. Our royalty income stream is dependent on the continued enforceability and validity of our patents, the ability of our competitors to design around our MOSFET technology or develop competing technologies, and general market conditions. The continuation of such royalties is subject to a number of risks (see “Item 7, Management’s Discussion and Analysis of Financial Condition—Factors that May Affect Future Results—Our ongoing protection and reliance on our intellectual property assets expose us to risks”).

Aside from our MOSFET technologies, our intellectual property strategy has been to use our intellectual property primarily for the design and development of a value-added family of products, and to defend those products in the marketplace.  In our IP segment, we concentrate our efforts on the licensing of technologies or fields of use that have application beyond our product groups or which no longer align with our long-term business strategies for our product groups. We also target certain technologies for

14




licensing that we believe help establish our product platforms and structures as industry standards and, thereby, enhance the growth of certain products.

Environmental Matters

Federal, state and local laws and regulations impose various restrictions and controls on the storage, use and discharge of certain materials, chemicals and gases used in semiconductor manufacturing processes. We do not believe that compliance with such laws and regulations as now in effect will have a material adverse effect on our results of operations, financial position or cash flows.

However, under some of these laws and regulations, we could be held financially responsible for remedial measures if properties are contaminated or if waste is sent to a landfill or recycling facility that becomes contaminated. Also, we may be subject to common law claims if it releases substances that damage or harm third parties. We cannot make assurances that changes in environmental laws and regulations will not require additional investments in capital equipment and the implementation of additional compliance programs in the future, which could have a material adverse effect on our results of operations, financial position or cash flows, as could any failure by us to comply with environmental laws and regulations.

IR and Rachelle Laboratories, Inc. (“Rachelle”), a former operating subsidiary of ours that discontinued operations in 1986, were each named a potentially responsible party (“PRP”) in connection with the investigation by the United States Environmental Protection Agency (“EPA”) of the disposal of allegedly hazardous substances at a major superfund site in Monterey Park, California (“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 us, for cost recovery and contribution under the provisions of the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”). We have settled all outstanding claims that have arisen against us out of the OII Site.  No claims against Rachelle have been settled.  We have taken the position that none of the wastes generated by Rachelle were hazardous.

Counsel for Rachelle received a letter dated August 2001 from the U.S. Department of Justice, directed to all or substantially all PRPs for the OII Site, offering to settle claims against such parties for all work performed through and including the final remedy for the OII Site.  The offer required a payment from Rachelle in the amount of approximately $9.3 million in order to take advantage of the settlement.  Rachelle did not accept the offer.

It remains the position of Rachelle that the wastes were not hazardous.  Our insurer has not accepted liability, although it has made payments for defense costs for the lawsuit against us.  We have made no accrual for potential loss, if any; however, an adverse outcome could have a material adverse effect on our results of operations or cash flows.

We received a letter in June 2001 from a law firm representing UDT Sensors, Inc. relating to environmental contamination (chlorinated solvents such as trichlorethene) assertedly found in UDT’s properties in Hawthorne, California. The letter alleges that we operated a manufacturing business at that location in the 1970’s and/or 1980’s and that we may have liability in connection with the claimed contamination. We have made no accrual for any potential losses since there has been no assertion of specific facts on which to form the basis for determination of liability.

Employees

As of August 31, 2005, we employed approximately 6,000 people, of whom approximately 4,000 were employed in North America, 1,300 in Europe and 700 in Asia Pacific and Japan. The only collective bargaining agreements to which we are subject apply to our employees in Italy. We have approximately 300 employees in Italy.  We consider our relations with our employees to be good.

15




Available Information

We file, with the Securities and Exchange Commission (“SEC”) pursuant to Section 13(a) or 15(d) of the Exchange Act, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished. These reports may be accessed at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room is available by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information about us. The SEC’s Internet address is http://www.sec.gov.

Our Internet address is http://www.irf.com. We make available free of charge through our Internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

We also make available, free of charge, through our corporate governance website, our corporate charter, bylaws, Corporate Governance Guidelines, charters of the committees of our board of directors, code of ethics and other information and material, including information about how to contact our board of directors, its committees and their members. To find this information and materials, visit our corporate governance section of our website at www.irf.com.

Section 303A.12 of New York Stock Exchange Listed Company Manual Disclosure

Pursuant to Rule 303A.12(A) of the New York Stock Exchange (“NYSE”) Listed Company Manual, we submitted to the NYSE last year a Section 303A.12(a) Chief Executive Officer (“CEO”) Certification as required by such rule.  We also filed with the Securities and Exchange Commission the CEO and Chief Financial Officer certifications required under Section 302 of the Sarbanes-Oxley Act of 2002 as exhibits to both this Form 10-K with respect to our 2005 fiscal year and our Form 10-K filed last year with respect to our 2004 fiscal year. All of the above certifications were provided without qualification.

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Item 2. Properties

We maintain manufacturing and office facilities around the world. Our major facilities, as of September 15, 2005, are in the following locations and used by the following segments:

Location

 

 

 

Owned

 

Leased

 

Semiconductor
Fabrication

 

Assembly/
Module
Manufacturing

 

Design
Center

 

Business
Office

 

Business
Segment(s)*

 

El Segundo, California (U.S.A.)

 

 

X

 

 

 

X

 

 

 

X

 

 

 

 

 

 

 

X

 

 

 

X

 

 

C&C, ESP, A&D, IP, CP

 

Temecula, California (U.S.A)

 

 

X

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

X

 

 

C&C, ESP, A&D, CP

 

Santa Clara, California (U.S.A)

 

 

 

 

 

 

X

 

 

 

 

 

 

 

X

 

 

 

X

 

 

 

 

 

 

A&D

 

Irvine, California
(U.S.A)

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

C&C, ESP

 

Mesa, Arizona (U.S.A)

 

 

X

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

C&C, ESP, A&D, CP

 

Cary, North Carolina (U.S.A)

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

C&C, ESP

 

Leominster, Massachusetts
(U.S.A)

 

 

X

 

 

 

X

 

 

 

 

 

 

 

X

 

 

 

X

 

 

 

 

 

 

A&D

 

North Kingston, Rhode Island (U.S.A)

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

C&C, ESP

 

Halifax, Canada

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

C&C, ESP

 

Tijuana, Mexico

 

 

X

 

 

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

X

 

 

C&C, ESP, A&D, CP

 

Oxted, England (U.K.)

 

 

X

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

C&C, ESP

 

Whyteleafe, England (U.K.)

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

X

 

 

C&C, ESP

 

Swansea, Wales (U.K.)

 

 

X

 

 

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

ESP, NAP

 

Newport, Wales (U.K.)

 

 

X

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

C&C, ESP

 

Skovlunde, Denmark

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

A&D

 

Provence, France

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

C&C, ESP

 

Torino, Italy

 

 

X

 

 

 

X

 

 

 

X

 

 

 

X

 

 

 

X

 

 

 

X

 

 

NAP, CP

 

Pavia, Italy

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

C&C, ESP

 

Krefeld, Germany

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

ESP, NAP

 

Singapore

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

X

 

 

 

X

 

 

C&C, ESP, CP

 

Shanghai, China

 

 

X

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

X

 

 

C&C, ESP

 

Xian, China

 

 

X

 

 

 

X

 

 

 

 

 

 

 

X

 

 

 

X

 

 

 

X

 

 

C&C, ESP

 

Mumbai, India

 

 

 

 

 

 

X

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

CP , NAP

 


 

*

C&C:

Computing and Communications

 

ESP:

Energy-Saving Products

 

A&D:

Aerospace and Defense

 

IP:

Intellectual Property

 

CP:

Commodity Products

 

NAP:

Non-Aligned Products

 

We believe our facilities are adequate for current and anticipated near-term operating needs. At fiscal year ended June 30, 2005, we operated in the low 90s percent of our worldwide semiconductor fabrication and assembly/module manufacturing capacities, without taking into account subcontract or foundry capacity. Demand for our Focus Products contributed to the high levels of capacity utilization. In order to

17




continue to meet the high demand for our Focus Products, we plan to accelerate our capital expansion plans. As a consequence we anticipate nearly 70 percent of capital expenditures for fiscal year 2006 will be in the first half of the year. Included in this plan is the ramp up of our 200mm wafer fabrication manufacturing facility in Newport, Wales that will provide our most advanced production capabilities. We also plan to increase manufacturing efficiencies for our Non-Focus Product segments by consolidating certain facilities as part of our restructuring activities (see “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 6, “Impairment of Assets, Restructuring and Severance Charges” to Consolidated Financial Statements).

In addition to the facilities listed above, we have sales or technical support offices located in Australia, Canada, China, the Czech Republic, Denmark, Finland, France, Germany, Hong Kong, Hungary, India, Italy, Japan, Mexico, New Zealand, the Philippines, Russia, Singapore, South Korea, Spain, Sweden, Switzerland, Taiwan, the United Kingdom and the United States.

Item 3. Legal Proceedings

In June 2000, we filed suit in Federal District Court in Los Angeles, California against IXYS Corporation, alleging infringement of our key U.S. patents 4,959,699; 5,008,725 and 5,130,767. The suit sought damages and other relief customary in such matters. The Federal District Court entered a permanent injunction, effective on June 5, 2002, barring IXYS from making, using, offering to sell or selling in, or importing into the United States, MOSFETs (including IGBTs) covered by our U.S. patents 4,959,699; 5,008,725 and/or 5,130,767. In August 2002, the Court of Appeals for the Federal Circuit stayed that injunction, pending appeal on the merits. In that same year, following trial on damages issues, a Federal District Court jury awarded us $9.1 million in compensatory damages. The Federal District Court subsequently tripled the damages, increasing the award from $9.1 million to approximately $27.2 million, and ruled that we are entitled to an additional award of reasonable attorney’s fees for a total monetary judgment of about $29.5 million. In March 2004, the U.S. Court of Appeals for the Federal Circuit reversed the summary judgment granted to us by the Federal District Court in Los Angeles of infringement by IXYS of our U.S. patents 4,959,699; 5,008,725 and 5,130,767. The Federal Circuit reversed in part and vacated in part infringement findings of the District Court, granted IXYS the right to present certain affirmative defenses, and vacated the injunction against IXYS entered by the District Court. The ruling by the Federal Circuit had the effect of vacating the damages judgment obtained against IXYS. The Federal Circuit affirmed the District Court’s rulings in our favor regarding the validity and enforceability of the three IR patents. Following remand, a federal court jury in Los Angeles, California held on September 15, 2005, that IXYS elongated octagonal MOSFETs and IGBTs infringed our 4,959,699 patent but did not infringe our 5,008,725 and 5,130,767 patents. The jury will return on October 4, 2005 to hear our claim for damages for infringement of the 4,959,699 patent. In addition, we will continue to pursue our other available remedies.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

18




Additional Item. Executive Officers of the Registrant

Our executive officers serve at the discretion of the Board of Directors. Mr. Eric Lidow’s employment with IR is subject to the provisions of an executive employment agreement with IR dated May 15, 1991, and subsequently amended on April 12, 1995, June 22, 1998 and August 5, 1998.

The executive officers of IR are:

Eric Lidow

 

92

 

Chairman of the Board

Alexander Lidow

 

50

 

Chief Executive Officer

Michael P. McGee

 

46

 

Executive Vice President and Chief
Financial Officer

Robert Grant

 

42

 

Executive Vice President, Global Sales
and Corporate Marketing

Walter Lifsey

 

47

 

Executive Vice President, Operations

Michael A. Briere

 

43

 

Executive Vice President, Research and Development

Donald R. Dancer

 

54

 

Vice President, General Counsel and
Secretary

 

Eric Lidow, the founder of the Company, has been a director since our inception in 1947 and was Chief Executive Officer until March 1995. Mr. Lidow continues as Chairman of the Board.

Alexander Lidow, Ph.D., has been employed by us since 1977. He was elected a director in September 1994 and Chief Executive Officer in March 1995. Dr. Lidow serves on the Board of Trustees of the California Institute of Technology. Dr. Lidow is a son of Eric Lidow.

Michael P. McGee joined us in 1990. He became Vice President and Chief Financial Officer in 1993. In November 1998, Mr. McGee was elected Executive Vice President.  From June 2000 to June 2005, he was also Chairman of Nihon Inter Electronics Corporation, a publicly-held Japanese corporation. From June 2000 to June 2003, he was also Co-Chief Executive Officer of that company.

Robert Grant joined us in 1992 as Director, Worldwide Customer Operations. In October 1998, Mr. Grant became Senior Vice President, Customer Service and Sales Systems, and in October 1999 became Senior Vice President, Marketing Communications and eCommerce. In July 2000, Mr. Grant was elected Executive Vice President. He was promoted to Executive Vice President, Global Sales and Corporate Marketing in November 2001.

Walter Lifsey has been employed by us since 1999. His most recent assignment was as Senior Vice President, Corporate Development before being appointed Executive Vice President, Operations in April 2002. Prior to joining us, he held senior management positions at AMP, Inc. and TRW Inc.

Michael A. Briere, Ph.D., joined us in 2003 as the Vice President of Integrated Circuit Development, before his election in January 2005 to Executive Vice President, Research and Development. Prior to joining IR, Dr. Briere held technical and leadership roles at IBM, Cherry Semiconductor, ON Semiconductor and Vicor, where he led a start-up IC subsidiary, Picor.

Donald R. Dancer joined us in August 2002. He most recently was General Counsel for GE Industrial Systems Solutions and served 22 years in various senior legal positions with the General Electric Company.

19




PART II

Item 5. Market for the Registrants’ Common Equity and Related Stockholder Matters

Price Range of Common Stock

(Closing Prices in Dollars)

 

 

First Quarter

 

Second Quarter

 

Third Quarter

 

Fourth Quarter

 

Fiscal Year

 

 

 

High

 

Low

 

High

 

Low

 

High

 

Low

 

High

 

Low

 

2005

 

39.20

 

31.39

 

44.98

 

34.23

 

47.30

 

35.29

 

49.64

 

40.34

 

2004

 

43.98

 

28.00

 

56.25

 

41.00

 

54.50

 

41.59

 

49.11

 

37.66

 

 

Our common stock is traded on The New York Stock Exchange and The Pacific Exchange under the symbol “IRF.” There were 1,763 holders of record of our common stock as of September 9, 2005. On September 9, 2005, the closing sale price of the common stock on The New York Stock Exchange was $49.75. Shareholders are urged to obtain current market quotations for the common stock. No cash dividends have been declared to stockholders during the past two years, and we do not expect to declare cash dividends in the foreseeable future. The payment of dividends is within the discretion of our Board of Directors, and will depend upon, among other things, our earnings, financial condition, capital requirements, and general business conditions. In addition, our bank credit agreement currently includes covenants putting limitations on certain dividend payments.

The quoted market prices are as reported on The New York Stock Exchange Composite. Stockholders are urged to obtain current market quotations for the common stock.

20




Item 6. Selected Financial Data

The selected consolidated financial data as of June 30, 2005 and 2004 and for the fiscal years ended June 30, 2005, 2004 and 2003, are derived from our audited consolidated financial statements and should be read in conjunction with our audited consolidated financial statements and notes beginning on page 53. The selected consolidated financial data as of June 30, 2003, 2002 and 2001, and for the fiscal years ended June 30, 2002 and 2001, are derived from our audited consolidated financial statements which are not included in this document.

 

 

Fiscal Years Ended June 30,

 

 

 

2005

 

2004

 

2003

 

2002

 

2001

 

Statement of Operations Data (1) (In thousands except per share data)

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

1,174,424

 

$

1,060,500

 

$

864,443

 

$

720,229

 

$

978,585

 

Gross profit (2)

 

510,523

 

411,094

 

287,810

 

256,859

 

356,191

 

Gross profit margin (2)

 

43.5

%

38.8

%

33.3

%

35.7

%

36.4

%

Selling and administrative expense

 

173,037

 

164,723

 

142,499

 

125,578

 

137,662

 

Selling and administrative as a percent of revenues

 

14.7

%

15.5

%

16.5

%

17.4

%

14.1

%

Research and development expense

 

104,876

 

92,156

 

78,904

 

69,775

 

69,648

 

Research and development as a percent of revenues

 

8.9

%

8.7

%

9.1

%

9.7

%

7.1

%

Impairment of assets, restructuring and severance charges (3)

 

33,952

 

33,534

 

187,890

 

 

47,992

 

Income (loss) before income taxes (4)

 

184,068

 

118,284

 

(126,198

)

65,811

 

118,381

 

Provision for (benefit from) income taxes

 

46,608

 

28,514

 

(36,559

)

17,111

 

30,732

 

Tax rate (benefit)

 

25.3

%

24.1

%

(29.0

)%

26.0

%

26.0

%

Income (loss) from continuing operations 

 

137,460

 

89,770

 

(89,639

)

48,700

 

87,649

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic (5)

 

$

2.03

 

$

1.37

 

$

(1.40

)

$

0.77

 

$

1.41

 

Diluted (5)(6)

 

$

1.91

 

$

1.31

 

$

(1.40

)

$

0.75

 

$

1.35

 

 

 

 

At June 30,

 

 

 

2005

 

2004

 

2003

 

2002

 

2001

 

Balance Sheet Data (In thousands)

 

 

 

 

 

 

 

 

 

 

 

Cash and cash investments

 

$

940,720

 

$

836,209

 

$

721,492

 

$

671,312

 

$

851,361

 

Total assets

 

2,223,544

 

2,017,006

 

1,821,852

 

1,813,182

 

1,746,462

 

Long-term debt, less current
maturities

 

547,259

 

560,019

 

579,379

 

566,841

 

552,751

 

Cash Flows Data (In thousands) (1)

 

 

 

 

 

 

 

 

 

 

 

Cash provided by operating activities

 

$

220,925

 

$

162,973

 

$

129,491

 

$

43,353

 

$

221,803

 

Cash used in investing activities (7)

 

(277,035

)

(79,899

)

(68,236

)

(212,899

)

(590,763

)

Cash provided by financing
activities (8)

 

76,405

 

43,365

 

2,635

 

14,201

 

569,401

 


(1)          Certain reclassifications have been made to previously reported amounts to conform to the current year presentation. Certain reclassifications have been made to June 30, 2004 and 2003 cash used in investing activities. Previously, our investments in auction rate preferred securities were recorded in cash and cash equivalents rather than short-term cash investments. We reclassified auction rate

21




preferred securities from cash and cash equivalents to short-term investments because the underlying instruments have contractual maturity dates exceeding ninety days. As a result of the reclassifications, our net cash used in investing activities increased by $33.4 million and decreased by $48.3 million for the fiscal years ended June 30, 2004 and 2003, respectively. The reclassifications had no impact on our total current assets, stockholders’ equity, cash flows provided by operating activities or total consolidated results reported in any period presented. As of June 30, 2005, we do not invest in auction rate securities.

(2)          Gross profit for the fiscal years ended June 30, 2003 and 2001 includes pretax charges for inventory written down by $6.0 million and $38.4 million, respectively, which negatively impacted gross profit margin by (0.7%) and (3.9%) for fiscal years 2003 and 2001, respectively. The $6.0 million charge in fiscal 2003 reflects certain raw material and work-in-process inventories that were impaired as a result of our restructuring initiatives, including products that could not be completed in other facilities, materials that were not compatible with the processes used in the alternative facilities, and materials such as gases and chemicals that could not readily be transferred. The $38.4 million charge in fiscal 2001 reflects excess inventory written down to net realizable value as a result of semiconductor industry downturn and weak demand in our end markets.

(3)          Impairment of assets, restructuring and severance charges of $34.0 million, $33.5 million and $187.9 million for the fiscal years ended June 30, 2005, 2004 and 2003, respectively, are comprised of: (1) impairment of assets, plant closure and other charges of $25.3 million, $15.2 million and $169.7 million for fiscal years 2005, 2004 and 2003, respectively, and (2) severance-related charges of $8.7 million, $18.3 million and $18.2 million in fiscal years 2005, 2004 and 2003, respectively. Fiscal 2003 through 2005 charges were associated with our restructuring initiatives announced in the quarter ended December 31, 2002, which included asset impairment, plant closure costs and severance charges related to the elimination of manufacturing, operating and company-wide administrative personnel. Impairment of assets, restructuring and severance charges of $48.0 million for the fiscal year ended June 30, 2001, are comprised of: (1) impairment of assets and other charges of $45.2 million and (2) severance-related charges of $2.8 million. Fiscal year 2001 charges include asset impairment and severance charges associated with the elimination of company-wide administrative and operating personnel at our facilities in the United Kingdom.

(4)          Income before income taxes for the fiscal year ended June 30, 2005 includes restructuring-related charges as noted at Note (3) above and one-time $6.0 million charge associated with the accelerated vesting of stock options. Income before income taxes for the fiscal year ended June 30, 2004 includes the restructuring-related charges as indicated at note (3) above and one-time $5.9 million Hitachi net settlement gain related to patent infringement. Income (loss) before income taxes for the fiscal years ended June 30, 2003 and 2002, includes restructuring-related charges as indicated at note (3) above and $2.4 million and $7.4 million, respectively, of non-recurring net gains recorded as a result of insurance settlement related to certain damaged fabrication equipment. Fiscal year 2002 net insurance gain was partially offset by non-recurring litigation and claims settlements of $3.7 million.

(5)          Net income (loss) per common share, basic and diluted, for fiscal years ended June 30, 2005, 2004, 2003 and 2001, includes impairment of assets, restructuring and severance charges outlined in Notes (2) and (3) above of ($0.38), ($0.39), ($2.16) and ($1.03), respectively. Additionally, net income per common share, basic and diluted includes ($0.07) charge from the accelerated vesting of stock options for fiscal year 2005, and $0.07 income from the one-time Hitachi settlement gain related to patent infringement for fiscal year 2004. Net income (loss) per common share, basic and diluted, for fiscal years 2003 and 2002 includes $0.03 and $0.09, respectively, income from the one-time net insurance gains as indicated at Note (4) above. Fiscal 2002 also includes ($0.04) charge from litigation and claims settlement.

22




(6)          Net income per common share, diluted for the fiscal year ended June 30, 2005 includes the dilutive effect from the conversion of our outstanding convertible subordinated notes into 7,439,000 shares of common stock (the “Effect”) of ($0.06). Prior years’ net income (loss) per common share, diluted did not include the Effect, as the Effect would have been anti-dilutive. Additionally, 859,000 shares of the Company’s stock options for the fiscal year ended June 30, 2003 were excluded from the “net loss per common share—diluted” calculation, since including those shares would have been anti-dilutive.

(7)          Cash flows used in investing activities primarily reflect net cash used to purchase cash investments and capital expenditures for all years presented. Cash flows used in investing activities in fiscal years ended June 30, 2005, 2002 and 2001, include acquisitions of certain assets, net of cash, of $51.1 million, $169.6 million and $74.7 million, respectively.

(8)          Cash flows provided by financing activities for the fiscal years ended June 30, 2005, 2004, 2003, 2002 and 2001 reflect $75.8 million, $44.2 million, $8.1 million, $11.2 million and $51.2 million, respectively, for the exercise of stock options and from sales of stock under our employee stock purchase plan. Cash flows provided by financing activities in fiscal 2001 included the issuance of $550 million of 4.25 percent convertible subordinated notes due 2007.

23




Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read together with the consolidated financial statements and notes to consolidated financial statements included elsewhere in this Form 10-K. Except for historic information contained herein, the matters addressed in this Item 7 constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are subject to a variety of risks and uncertainties, including those discussed under the heading “Cautionary Statement for Purposes of the ‘Safe Harbor’ Provision of Private Securities Litigation Reform Act of 1995”, “Factors That May Affect Future Results” and elsewhere in this Annual Report on From 10-K, that could cause actual results to differ materially from those anticipated by us. We undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this Annual Report or to reflect actual outcomes.

Overview

This section presents summary information regarding our industry, markets, products and operating trends only. For further information regarding our financial condition and results of operation, please read our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in its entirety, of which this is a part.

Company and Industry

We are a leading designer, manufacturer and marketer of power management products using power semiconductors. Power semiconductors process electricity into a form more usable by electrical products. Our products address the two core challenges of power management, power performance and power conservation, by increasing system efficiency, allowing more compact end products, improving features and functionality, increasing fuel efficiency and extending battery life.

We focus on the power management requirements of specific applications and bring our comprehensive portfolio of products and technologies to better satisfy the needs of that application. We concentrate on markets including computers, communications networking, consumer electronics, energy-saving appliances, lighting, satellites, launch vehicles, aircraft and automotive diesel injection, where our comprehensive portfolio of technologies enable better, more competitive end products.

According to iSuppli, a leading industry source of market information, the market for power management semiconductors in calendar year 2004 was approximately $21 billion, growing to approximately $24 billion in calendar year 2005. Our Power Management ICs, Advanced Circuit Devices, Power Components and Power Systems address approximately $15 billion or over 70 percent of this market. We have seen signs of recovery from what we believe was an inventory correction in the first half of calendar year 2005. However, overall economic conditions can be uncertain and difficult to predict.

We believe current demand for our products is driven largely by the following:

·       Information Technology demand for increased speed and functionality

·       Consumer and Industrial demand for energy-efficiency

·       Automotive demand for increased fuel economy

·       Aerospace and Defense demand for advanced power management technology

We divide our products among three general product categories: Power Management ICs and Advanced Circuit Devices, Power Components and Power Systems. We report our results in six segments that generally reflect the products’ end-markets and our decision-making for our company about allocating

24




resources, including the focus of research and development activities, and in assessing performance. We also generate revenues by licensing our intellectual property to third parties.

We summarize our segments into two groups, Focus Products and Non-Focus Products. Our Focus Product segments are: Computing and Communications (“C&C”), Energy-Saving Products (“ESP”), Aerospace and Defense (“A&D”), and Intellectual Property (“IP”). Our Non-Focus Product segments are: Commodity Products (“CP”) and Non-Aligned Products (“NAP”). To facilitate the comparison of current year segment results to that of prior years, segment disclosures for fiscal 2004 and 2003 have been restated to reflect these changes. (See also Note 7 to the Consolidated Financial Statements, “Segment and Geographic Information” for further details about our segments.)

We market our products through direct sales staff, representatives and distributors. Our customers include original equipment manufacturers (“OEMs”), distributors and subcontract manufacturers. For our customers in our Focus Product segments, we primarily use direct sales staff and representatives. In line with this strategy, we have added a complement of field application engineers and technical sales support staff to better serve the customers’ needs. For customers in the Commodity Product segment, we primarily sell through distributors, taking advantage of cross-selling opportunities with our other product families. No single OEM customer, distributor or subcontract manufacturer accounted for more than ten percent of our consolidated revenue for the fiscal year ended June 30, 2005.

We conduct research and development activities to improve the performance and cost effectiveness of our product offerings in target applications. Our research and development program focuses on Power Management ICs, Advanced Circuit Devices and Power Systems and the advancement and diversification of our HEXFET® power MOSFET and IGBT product lines within our Focus Product segments. Our program places increasing emphasis on the development of chipsets and system-level solutions that improve overall system performance and cost, and helps customers accelerate market introduction of their products. In the fiscal years ended June 30, 2005, 2004 and 2003, we spent $104.9 million, $92.2 million and $78.9 million, respectively, on research and development activities.

We fabricate most of our chips in facilities designed to address the specific requirements of power semiconductors. We believe our wafer fabrication costs are among the lowest in the industry. We have wafer fabrication and/or assembly production facilities in California, Massachusetts, Mexico, the United Kingdom, Italy, India and China. We also use third-party foundries and assemblers that provides us with capacity flexibility. We have been ramping up our most advanced manufacturing facility in Newport, Wales (United Kingdom) acquired in fiscal 2002. We plan to utilize this fabrication capacity almost exclusively for our Focus Products which offers us the much needed capacity over the next several years to support our growth.

Overview of Fiscal Year 2005 Results

Our revenues increased by 11 percent to $1.17 billion for the fiscal year ended June 30, 2005, compared to $1.06 billion for the prior fiscal year ended June 30, 2004, reflecting the growth in sales of our Focus Products and the overall improved industry and economic conditions. Gross profit margin during the same period grew to 43.5 percent of revenues for the fiscal year ended June 30, 2005, compared to 38.8 percent in the prior year. This improvement reflected the sale of a higher margin mix of our Focus Products, greater manufacturing efficiency from increased capacity utilization, and manufacturing cost savings across all segments. The revenue increase from our Focus Product segments was partially offset by decrease from sales of our Non-Focus Product segments. Royalties contributed $41.2 million to fiscal year 2005 revenues, compared to $41.9 million in fiscal year 2004.

Revenues as a percentage of total product revenues based on sales location were approximately 32 percent, 45 percent and 23 percent for North America, Asia and Europe, respectively, for the fiscal year ended June 30, 2005. Revenues as a percentage of total product revenues were approximately 30 percent,

25




46 percent and 24 percent for North America, Asia and Europe, respectively, for the fiscal year ended June 30, 2004.

Revenues from our Focus Product segments increased by 18 percent to $857.6 million for the fiscal year ended June 30, 2005 compared to $729.6 million in the prior fiscal year. These revenues comprised 73 percent of total revenues for fiscal year 2005, compared to 69 percent for fiscal year 2004. Gross margin for our Focus Product segments increased to 50.6 percent for the fiscal year ended June 30, 2005, compared to 46.5 percent in the prior fiscal year ended. We refer to the products we sell within our Focus Product segments as our “Focus Products”.

Revenues from our Non-Focus Product segments decreased by four percent to $316.8 million in fiscal 2005 from $330.9 million in fiscal 2004. Gross margin for our Non-Focus Product segments increased to 24.1 percent for the fiscal year ended June 30, 2005, compared to 21.7 percent in the prior fiscal year ended. In our Non-Focus Product segments, the market for these low-margin commodity products faced a serious inventory correction, sharply reduced lead-times and increased price pressures during fiscal year 2005. However, the commodity market conditions appear to be improving and we expect the improvement to continue through fiscal year 2006.

For the twelve months ended June 30, 2005, selling and administrative expense was $173.0 million (14.7 percent of revenues), compared to $164.7 million (15.5 percent of revenues) in the twelve months ended June 30, 2004.

For the twelve months ended June 30, 2005 and 2004, research and development expense was $104.9 million and $92.2 million (8.9 percent and 8.7 percent of revenues, respectively).

As of fiscal year ended June 30, 2005, we have substantially completed our restructuring activities previously announced in calendar years 2001 and 2002, which included reorganizing certain business units in the fourth quarter of fiscal 2005, based on the products’ end-markets or strategic application.

We are also continuing with our plan to review product lines and products not aligned with our long-term objectives to increase our overall gross margins to over 50 percent. We have discontinued business opportunities of over $100 million in annualized revenues since the beginning of fiscal year 2004, across various segments. Within our Non-Aligned Product segment, we have targeted an additional $110 million for realignment, whether by changing the model for how we participate in the business, or by divestiture or other transaction, such as a joint venture or strategic partnership. We plan to support our Non-Focus Product segments to the extent we believe appropriate, in order to manage, maintain or increase their value in line with our long-term goals for those segments. (Refer to “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Fiscal 2005 Compared with Fiscal 2004” and Note 7 to Consolidated Financial Statements, “Segment and Geographic Information,” for further discussions about our business segments.)

As of fiscal year ended June 30, 2005, we operated in the low 90s percent of our worldwide semiconductor fabrication and assembly/module manufacturing capacities, without taking into account subcontract or foundry capacity. Demand for our Focus Products contributed to the high levels of capacity utilization and we continue to invest significantly in our most advanced manufacturing facility in Newport, Wales, to provide additional capacity to support our Focus Products. We advanced our capital expansion plans in the last quarter of the fiscal year 2005, to address market conditions and capacity requirements for our Focus Products. We invested strategically in our core technologies including acquiring the specialty epitaxial services business from Advanced Technology Materials, Inc. at the beginning of fiscal year 2005. This acquisition enhances our ability to produce future generations of innovative power technologies.

We are committed to attracting and retaining the industry’s best qualified technical, sales, marketing and managerial personnel. With the issuance of FASB Statement No. 123R, “Share-Based Payment” (“SFAS No. 123R”) that becomes effective for us in the first quarter of fiscal year 2006, we will reduce the

26




number of employees who will receive stock options. We have established a new profit sharing plan to be in place for the new fiscal year 2006, to offset the impact of the option grant reduction and offer eligible employees long-term rewards. For fiscal year 2006, we anticipate that 10 percent of our net income before the profit sharing plan expense will be paid to certain eligible employees. In April 2005, we accelerated the vesting of all then outstanding equity awards, including employee stock options and restricted stock units, in anticipation of the adoption of SFAS No. 123R. We will avoid approximately $108 million in future compensation expense associated with our equity awards, of which approximately $60 million would have been in fiscal year 2006. (Refer to Note 5 to Consolidated Financial Statements, “Capital Stock” for further details about our stock option plans.)

At June 30, 2005, we had cash and cash equivalent balances of $360.0 million and cash investments in marketable debt securities of $580.7 million. Our cash, cash equivalents, cash investments in marketable debt securities and unused credit facilities of $132.1 million, totaled $1.07 billion. During the fiscal year ended June 30, 2005, operating activities generated cash flow of $220.9 million compared to $163.0 million in the prior fiscal year. Our cash, cash equivalents and cash investments totaled $940.7 million at fiscal year ended June 30, 2005, to position us for continued strong growth in fiscal year 2006.

Results of Operations

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

 

 

Fiscal Years Ended June 30,

 

 

 

2005

 

2004

 

2003

 

Revenues

 

$

1,174.4

 

100.0

%

$

1,060.5

 

100.0

%

$

864.4

 

100.0

%

Cost of sales

 

663.9

 

56.5

 

649.4

 

61.2

 

576.6

 

66.7

 

Gross profit

 

510.5

 

43.5

 

411.1

 

38.8

 

287.8

 

33.3

 

Selling and administrative expense

 

173.0

 

14.7

 

164.7

 

15.5

 

142.5

 

16.5

 

Research and development expense

 

104.9

 

8.9

 

92.2

 

8.7

 

78.9

 

9.1

 

Amortization of acquisition-related intangible assets

 

5.9

 

0.5

 

5.6

 

0.5

 

5.4

 

0.6

 

Impairment of assets, restructuring and severance charges

 

33.9

 

2.9

 

33.5

 

3.2

 

187.9

 

21.7

 

Other expense (income), net

 

7.4

 

0.7

 

(5.0

)

(0.5

)

0.0

 

0.0

 

Interest expense (income), net

 

1.3

 

0.1

 

1.8

 

0.2

 

(0.7

)

0.0

 

Income (loss) before income taxes

 

184.1

 

15.7

 

118.3

 

11.2

 

(126.2

)

(14.6

)

Provision for (benefit from) income taxes

 

46.6

 

4.0

 

28.5

 

2.7

 

(36.6

)

(4.2

)

Net income (loss)

 

$

137.5

 

11.7

%

$

89.8

 

8.5

%

$

(89.6

)

(10.4

)%

 

Fiscal 2005 Compared with Fiscal 2004

Revenues and Gross Margin

Revenues increased by 11 percent to $1.17 billion for the fiscal year ended June 30, 2005, compared to $1.06 billion for the prior fiscal year ended June 30, 2004. The increase reflected the growth in sales of our Focus Products and the overall improved industry and economic conditions. Royalties contributed $41.2 million to fiscal year 2005 revenues, compared to $41.9 million in fiscal year 2004.

Revenues from our Focus Products increased by 18 percent to $857.6 million for the fiscal year ended June 30, 2005, compared to $729.6 million in the prior fiscal year. These revenues comprised 73 percent of total revenues for fiscal year 2005, compared to 69 percent for fiscal year 2004. Our Focus Products include our valued-added Power Management ICs, Advanced Circuit Devices and Power Systems, and Power

27




Components that are sold into our C&C, ESP and A&D segments, as well as revenues from our IP segment. The revenue increase from our Focus Products was partially offset by decrease from sales of our Non-Focus Products (which includes our CP and NAP segments). Non-Focus Products revenues decreased by four percent to $316.8 million in fiscal 2005 from $330.9 million in fiscal 2004.

Revenues as a percentage of total product revenues based on sales location were approximately 32 percent, 45 percent and 23 percent for North America, Asia and Europe, respectively, for the fiscal year ended June 30, 2005. Revenues as a percentage of total product revenues were approximately 30 percent, 46 percent and 24 percent for North America, Asia and Europe, respectively, for the fiscal year ended June 30, 2004.

For the fiscal year ended June 30, 2005 and 2004, gross profit was $510.5 million and $411.1 million (43.5 percent and 38.8 percent of revenues), respectively. The gross profit margin improvement reflected the sale of a higher margin mix of our Focus Products, greater manufacturing efficiency from increased capacity utilization, and manufacturing cost savings across all segments. Average product selling price sold across all our segments declined by approximately four percent. We have discontinued over $100 million of business opportunities since the beginning of fiscal year 2004 to help address the price pressures faced by the commodity components contained in our Focus Product and Non-Focus Product segments.

As of June 30, 2005, our backlog of orders was $393.7 million compared to $403.3 million as of June 30, 2004. The backlog for our C&C and CP segments declined, which was partially offset by increase in backlog for our ESP and A&D segments.

Revenues and gross margin by business segments are as follows (in thousands except percentages):

 

 

June 30, 2005

 

June 30, 2004

 

Business Segment

 

 

 

Revenues

 

Percentage
of Total

 

Gross
Margin

 

Revenues

 

Percentage
of Total

 

Gross
Margin

 

Computing and Communications (“C&C”)

 

$

386,662

 

 

32.9

%

 

 

44.6

%

 

$

328,330

 

 

31.0

%

 

 

40.6

%

 

Energy-Saving Products (“ESP”)

 

300,521

 

 

25.6

 

 

 

55.0

 

 

250,763

 

 

23.6

 

 

 

49.2

 

 

Aerospace and Defense (“A&D”)

 

129,295

 

 

11.0

 

 

 

42.8

 

 

108,610

 

 

10.2

 

 

 

37.4

 

 

Intellectual Property (“IP”)

 

41,160

 

 

3.5

 

 

 

100.0

 

 

41,927

 

 

4.0

 

 

 

100.0

 

 

Subtotal Focus Products

 

857,638

 

 

73.0

 

 

 

50.6

 

 

729,630

 

 

68.8

 

 

 

46.5

 

 

Commodity Products (“CP”)

 

206,226

 

 

17.6

 

 

 

28.6

 

 

217,856

 

 

20.5

 

 

 

25.7

 

 

Non-Aligned Products (“NAP”)

 

110,560

 

 

9.4

 

 

 

15.9

 

 

113,014

 

 

10.7

 

 

 

14.1

 

 

Subtotal Non-Focus Products

 

316,786

 

 

27.0

 

 

 

24.1

 

 

330,870

 

 

31.2

 

 

 

21.7

 

 

Consolidated Total

 

$

1,174,424

 

 

100.0

%

 

 

43.5

%

 

$

1,060,500

 

 

100.0

%

 

 

38.8

%

 

 

Computing and Communications

Our Computing and Communications segment is comprised of our Power Management ICs, Advanced Circuit Devices, including iPowir multi-chip modules and DirectFET solutions, and Power Components (primarily HEXFET Power Components) that address servers and high-end desktops, notebooks, communications networking, and digitally-oriented consumer products like game consoles. Our C&C segment products are also used in digital television, portable handheld devices and cellular phones, and are primarily used for DC-DC converter type applications. C&C segment revenues increased by 18 percent compared to the prior fiscal year, reflecting more units sold as a result of increasing demands for greater computing power and improved communications. We believe we will continue to grow our server market share and we expect an increase in our communications and networking business, whose orders for the fiscal quarter ended June 30, 2005, were up 28 percent, compared to the fiscal quarter ended March 31, 2005.

28




Gross margin for the C&C segment improved to 44.6 percent for the fiscal year ended June 30, 2005, from 40.6 percent for the prior fiscal year, reflecting revenue growth as indicated above, sales from higher margin product lines, such as DirectFET HEXFET Power MOSFETS, greater manufacturing efficiency from increased capacity utilization, and restructuring cost savings.

Energy-Saving Products

Our Energy-Saving Product segment is comprised of our Power Management ICs, Advanced Circuit Devices and Power Components (primarily HEXFET and IGBT Power Components) for variable speed motion control in energy-saving appliances (such as washing machines, refrigerators and air conditioners), industrial systems (such as fans, pumps and compressors), advanced lighting products (including fluorescent lamps, high intensity discharge (“HID”) lamps, cold cathode fluorescent (“CCFL”) tubes and light emitting diodes (“LED”) lighting), advanced automotive solutions (primarily diesel injection, electric-gasoline hybrid and electric power steering systems), and consumer applications (for example, plasma TVs and digital-audio units). ESP segment revenues increased by 20 percent, which is attributed to more units sold as a result of energy shortages driving demand for greater efficiency across various end-market applications. The strong housing industry worldwide is increasing demand for our energy-saving appliance business. At the same time, developing economies such as China and India are contributing to the growth in our lighting business. Our appliance and lighting revenues increased by 41 percent during the fiscal year ended June 30, 2005 compared to the prior fiscal year.

Gross margin for the ESP segment improved to 55.0 percent for the fiscal year ended June 30, 2005, from 49.2 percent in the prior fiscal year, reflecting revenue growth as indicated above, sales of higher margin product lines, such as our energy-saving appliance modules, greater manufacturing efficiency from increased capacity utilization, and restructuring cost savings.

Aerospace and Defense

The Aerospace and Defense segment is comprised of advanced power management solutions, such as radiation-hardened power management modules, radiation-hardened Power Components, and other high-reliability Power Components that address power management requirements in satellites, launch vehicles, aircrafts, ships, submarines and other defense and high-reliability applications. Revenues for the fiscal year ended June 30, 2005 increased by 19 percent from the fiscal year ended June 30, 2004. Sales of new logic level radiation-hardened MOSFET products, additional sales into customer in-house DC-DC markets, and increased market share for more efficient and intelligent power management solutions contributed to this growth.

Gross margin for the A&D segment improved to 42.8 percent for the fiscal year ended June 30, 2005, from 37.4 percent in the prior fiscal year, reflecting revenue growth as indicated above, sales of higher margin product lines, such as the radiation-hardened power management modules, higher average selling price for certain products and restructuring cost savings.

Intellectual Property

The Intellectual Property segment reports our royalty income from licensing our intellectual property to third parties, which may include claims settlement from successful defense of our licenses. IP revenues for the fiscal year ended June 30, 2005 were fairly consistent with the prior fiscal year at $41.2 million for the fiscal year ended June 30, 2005 compared to $41.9 million for the prior fiscal year ended. Our licensed MOSFET patents expire between 2005 and 2010, with the broadest remaining in effect until 2007 and 2008. We continue to commit to research and development to generate new patents and other intellectual property and concentrate on incorporating our technologies into our Focus Products. We have a growing portfolio of over 400 U.S. patents, approximately 210 foreign patents and approximately 840 applications

29




pending worldwide. In the past fiscal year, we added over approximately 100 patents worldwide. We expect royalties in fiscal year 2006 to be consistent with fiscal year 2005.

Commodity Products

The Commodity Product segment is comprised primarily of older-generation Power Components that are sold with margins generally below our strategic targets and are typically commodity in nature. These products have widespread use throughout the power management products industry and are often complementary to many of our Focus Products offerings or allow us to provide a full range of customer or application offerings. We often offer these products to take advantage of cross-selling opportunities for our other product families. These products may help to increase our manufacturing economies of scale. For the fiscal year ended June 30, 2005, revenues were $206.2 million, down five percent from $217.9 million in the fiscal year ended June 30, 2004, as we continued to discontinue certain low margin business opportunities in fiscal year 2005.

Gross margin for our CP segment improved to 28.6 percent for the fiscal year ended June 30, 2005, from 25.7 percent in the prior fiscal year, reflecting greater manufacturing efficiency from increased capacity utilization and restructuring cost savings.

Non-Aligned Products

The Non-Aligned Product segment includes businesses, product lines or products we are targeting for realignment, whether by changing the business model for how we participate in the business, or by divestiture or other strategic transactions, such as joint venture or partnership. We plan to support our Non-Focus Products to the extent we believe appropriate, to manage, maintain or increase their value in line with our long-term goals for those segments. Currently, product lines reported in this segment include certain modules, rectifiers, diodes and thyristors used in the automotive, industrial, welding and motor control applications. Revenues for the fiscal year ended June 30, 2005 were $110.6 million, decreasing two percent from $113.0 million in the fiscal year ended June 30, 2004.

Gross margin for our NAP segment improved to 15.9 percent for the fiscal year ended June 30, 2005, from 14.1 percent in the prior fiscal year, reflecting greater manufacturing efficiency from increased capacity utilization and restructuring cost savings.

Selling and Administrative Expense

For the fiscal year ended June 30, 2005, selling and administrative expense was $173.0 million (14.7 percent of revenues), compared to $164.7 million (15.5 percent of revenues) for the twelve months ended June 30, 2004. The decline in the selling and administrative expense ratio primarily reflected a higher revenue base in the current year compared to the prior year and our cost containment efforts. The absolute selling and administrative expense increase primarily reflected sales commissions and other variable costs paid on a higher revenue base.

Research and Development Expense

For the fiscal year ended June 30, 2005 and 2004, research and development expense was $104.9 million and $92.2 million (8.9 percent and 8.7 percent of revenues, respectively). Research and development expenditures increased reflecting continued development efforts on our Focus Products across our C&C, ESP and A&D segments. Approximately 90 percent of the fiscal year 2005 spending was related to new technology and product development for our Focus Products

30




Impairment of Assets, Restructuring and Severance Charges

During fiscal 2003 second quarter ended December 31, 2002, we announced our restructuring initiatives. Under our restructuring initiatives, our goal was to reposition us to better fit the market conditions, de-emphasize the commodity business and accelerate the move to what we categorize as our proprietary products, which refer to our Power Management ICs, Advanced Circuit Devices and Power Systems. Our restructuring plan included consolidating and closing certain manufacturing sites, upgrading equipment and processes in designated facilities and discontinuing production in a number of others that cannot support more advanced technology platforms or products. We also planned to lower overhead costs across our support organizations. We have substantially completed these restructuring activities as of June 30, 2005. We expect to complete the remaining activities, primarily the closing of a fabrication line at El Segundo, California and an assembly line at Krefeld, Germany by fiscal year end 2006 or sooner.

We estimate that charges associated with the restructuring will be approximately $280 million. These charges will consist of approximately $220 million for asset impairment, plant closure costs and other charges, $6 million of raw material and work-in-process inventory, and approximately $54 million for severance. Of the $280 million in total charges, we expect cash charges to be approximately $110 million. For the fiscal year ended June 30, 2005, we realized savings of approximately $80 million from the restructuring activities, with approximately 70 percent of that savings affecting cost of goods sold.

For the fiscal year ended June 30, 2005, we recorded $34.0 million in total restructuring-related charges, consisting of: $25.3 million for asset impairment, plant closure costs and other charges and $8.7 million for severance-related costs. For the fiscal year ended June 30, 2004, we recorded $33.5 million in total restructuring-related charges, consisting of: $15.2 million for asset impairment, plant closure costs and other charges and $18.3 million for severance-related costs. Restructuring-related costs were measured in accordance with SFAS No. 146, “Accounting for the Costs Associated with Exit or Disposal Activities”. Asset impairments were calculated in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. In determining the asset groups, we grouped assets at the lowest level for which independent identifiable cash flows information was available. In determining whether an asset was impaired we evaluated undiscounted future cash flows and other factors such as changes in strategy and technology. The undiscounted cash flows from our initial analyses were less than the carrying amount for certain of the asset groups, indicating impairment losses. Based on this, we determined the fair value of these asset groups using the present value technique, by applying a discount rate to the estimated future cash flows that is consistent with the rate used when analyzing potential acquisitions.

As of June 30, 2005, we had recorded $261.4 million in total charges, consisting of: $210.2 million for asset impairment, plant closure costs and other charges, $6.0 million for raw material and work-in-process inventory charges, and $45.2 million for severance-related costs. Components of the $210.1 million asset impairment, plant closure and other charges included the following items:

·       As we emphasize more advanced generation planar products, we expect the future revenue stream from our less advanced facilities in Temecula, California to decrease significantly. These facilities had a net book value of $138.3 million and were written down by $77.7 million. It is expected that these facilities will continue in use until approximately December 2007 and the remaining basis is being depreciated over units of production during this period. It is assumed that salvage value will equal disposition costs.

·       As we emphasize more advanced generation trench products, we expect the future revenue stream from our less advanced facility in El Segundo, California to decrease significantly. This facility had a net book value of $59.5 million and was written down by $57.2 million. This facility had significantly reduced production as of fiscal year ended June 30, 2003, and is being used primarily for research and development activities.

31




·       As we emphasize more advanced generation Schottky products, we expect the future revenue stream from our less advanced facility in Borgaro, Italy to decrease significantly. This facility had a net book value of $20.5 million and was written down by $13.5 million. It is expected that this facility will continue in use until approximately December 2007 and the remaining basis is being depreciated over units of production during this period. It is assumed that salvage value will equal disposition costs.

·       We are restructuring our manufacturing activities in Europe. Based on a review of our Swansea, Wales facility, a general-purpose module facility, we determined that this facility would be better suited to focus only on automotive applications. The general-purpose assembly assets in this facility, with a net book value of $13.6 million, were written down by $8.2 million. In addition, we have substantially completed the move of our manufacturing activities at our automotive facility in Krefeld, Germany to our Swansea, Wales and Tijuana, Mexico facilities as of June 30, 2005. We have also moved the production from our Venaria, Italy facility to our Borgaro, Italy and Mumbia, India facilities, which was completed as of December 31, 2003. We stopped manufacturing activities in our Oxted, England facility as of September 30, 2003.

·       We have eliminated the manufacturing of our non-space military products in our Santa Clara, California facility as of July 31, 2004. Currently, subcontractors handle our non-space qualified products formerly manufactured in this facility. We are also transitioning the assembly and test of non-space Power Components from our Leominster, Massachusetts facility to our Tijuana, Mexico facility, and expect to complete this activity by calendar year end 2005. Associated with this reduction in manufacturing activities, certain assets with a net book value of $4.0 million were written down by $2.0 million.

·       $51.5 million in other miscellaneous items were charged, including $42.9 million in relocation costs and other impaired asset charges and $8.6 million in contract termination and settlement costs.

As a result of the restructuring initiatives, certain raw material and work-in-process inventories were impaired, including products that could not be completed in other facilities, materials that were not compatible with the processes used in the alternative facilities, and materials such as gases and chemicals that could not readily be transferred. Based on these factors we wrote down these inventories, with a carrying value of $98.2 million, by $6.0 million. For the fiscal years ended June 30, 2005, 2004 and 2003, we had disposed of $1.8 million, $0.4 million and $2.6 million, respectively, of these inventories, which did not have a material impact on gross margin for the fiscal years then ended. As of June 30, 2005, $1.2 million of these inventories remained to be disposed.

Our restructuring activities are expected to result in severance charges of approximately $54 million through June 2006. Below is a table of approximate severance charges by major activity and location:

Location

 

Activity

 

Amount

 

El Segundo, California

 

Close manufacturing facilities

 

$

15 million

 

Santa Clara, California and Leominster, Massachusetts

 

Eliminate certain manufacturing activities

 

4 million

 

Oxted, England

 

Close manufacturing facility

 

4 million

 

Veneria, Italy

 

Move manufacturing to India and discontinue certain products

 

11 million

 

Company-wide

 

Realign business processes

 

20 million

 

Total

 

 

 

$

54 million

 

 

To date, of the $54 million noted above, we have recorded $45.2 million in severance-related charges: $40.1 million in severance termination costs related to approximately 1,200 administrative, operating and

32




manufacturing positions, and $5.1 million in pension termination costs at our manufacturing facility in Oxted, England. For the fiscal years ended June 30, 2005 and 2004, we recorded $8.5 million and $15.5 million, respectively, in severance termination costs and $0 and $2.8 million, respectively, in pension termination costs. The severance charges associated with the elimination of positions, which included the 1,200 persons notified to date, had been and will continue to be recognized ratably over the future service period, as applicable, in accordance with SFAS No. 146, “Accounting for the Costs Associated with Exit or Disposal Activities”. We measured the total termination benefits at the communication date based on the fair value of the liability as of the termination date. A change resulting from a revision to either the timing or the amount of estimated cash over the future service period will be measured using the credit-adjusted risk-free rate that was used to initially measure the liability. The cumulative effect of the change will be recognized as an adjustment to the liability in the period of the change.

In fiscal 2003, we had recorded an estimated $5.1 million in severance costs associated with the acquisition of TechnoFusion GmbH in Krefeld, Germany. In fiscal 2004, we finalized our plan and determined that total severance would be approximately $10 million, and accordingly, we adjusted purchased goodwill by $4.8 million. We communicated the plan and the elimination of approximately 250 positions primarily in manufacturing to its affected employees at that time. The associated severance is expected be paid by calendar year end 2005.

The following summarizes our severance accrued related to the June 2001 restructuring, the TechnoFusion acquisition and the December 2002 restructuring plan for the fiscal years ended June 30, 2005, 2004 and 2003. Severance activity related to the elimination of 29 administrative and operating personnel as part of the previously reported restructuring in the fiscal quarter ended June 30, 2001, is also disclosed. The remaining June 2001 severance relates primarily to certain legal accruals associated with that restructuring, which will be paid or released as the outcome is determined (in thousands):

 

 

June
2001
Restructuring

 

December
2002
Restructuring

 

TechnoFusion
Severance
Liability

 

Total
Severance
Liability

 

Accrued severance, June 30, 2002

 

 

$

1,454

 

 

 

$

 

 

 

$

5,480

 

 

$

6,934

 

Costs incurred or charged to “impairment of assets, restructuring and severance charges”

 

 

 

 

 

15,991

 

 

 

 

 

15,991

 

Purchase price adjustment

 

 

 

 

 

 

 

 

4,823

 

 

4,823

 

Costs paid

 

 

(424

)

 

 

(10,058

)

 

 

 

 

(10,482

)

Foreign exchange impact

 

 

 

 

 

(299

)

 

 

(427

)

 

(726

)

Accrued severance, June 30, 2003

 

 

$

1,030

 

 

 

$

5,634

 

 

 

$

9,876

 

 

$

16,540

 

Costs incurred or charged to “impairment of assets, restructuring and severance charges”

 

 

 

 

 

15,450

 

 

 

 

 

15,450

 

Costs paid

 

 

(333

)

 

 

(13,935

)

 

 

(4,390

)

 

(18,658

)

Foreign exchange impact

 

 

 

 

 

31

 

 

 

581

 

 

612

 

Accrued severance, June 30, 2004

 

 

$

697

 

 

 

$

7,180

 

 

 

$

6,067

 

 

$

13,944

 

Costs incurred or charged to “impairment of assets, restructuring and severance charges”

 

 

 

 

 

8,677

 

 

 

 

 

8,677

 

Costs paid

 

 

(326

)

 

 

(7,810

)

 

 

(3,770

)

 

(11,906

)

Foreign exchange impact

 

 

 

 

 

77

 

 

 

(190

)

 

(113

)

Accrued severance, June 30, 2005

 

 

$

371

 

 

 

$

8,124

 

 

 

$

2,107

 

 

$

10,602

 

 

Other Income and Expense

Other (expense) income was ($7.4) million and $5.0 million for the fiscal years ended June 30, 2005 and 2004, respectively. For the fiscal year ended June 30, 2005, we recorded one-time $6.0 million charge

33




associated with the accelerated vesting of stock options in order to avoid approximately $108 million of future compensation expense associated with our previously issued stock options and restricted stock units, as a result of the adoption of SFAS No. 123R. For the fiscal year ended June 30, 2004, we recognized $5.9 million in one-time pretax gains from the Hitachi settlement, net of legal costs and related expenses.

Interest Income and Expense

Interest income was $18.0 million and $14.2 million for the twelve months ended June 30, 2005 and 2004, respectively. The increase in income reflected higher prevailing interest rates and higher average cash and cash investment balance in the current year.

Interest expense was $19.2 million and $16.0 million for the twelve months ended June 30, 2005 and 2004, respectively. The increase in current period expense primarily reflected higher effective interest rate payable on our $550 million convertible subordinated notes outstanding (see Note 4 of the Notes to the Consolidated Financial Statements, “Bank Loans and Long-Term Debt” regarding the modification of the effective interest payable on our convertible notes).

Income Taxes

Our effective tax provision for the twelve months ended June 30, 2005 and 2004, was 25.3 percent and 24.1 percent, respectively, rather than the expected U.S. federal statutory tax provision of 35 percent, as a result of lower statutory tax rates in certain foreign jurisdictions, the benefit of foreign tax credits and research and development credits; partially offset by state taxes and certain foreign losses without foreign tax benefit.

Fiscal 2004 Compared with Fiscal 2003

Revenues and Gross Margin

Revenues for fiscal 2004 were $1.06 billion compared to $864.4 million in fiscal 2003. Fiscal 2004 revenues reflected the growth in sales of what we categorize as our Focus Products and the upturn in the semiconductor industry. Our Focus Product sales increased by 25 percent from the prior year and our Non-Focus Products sales increased by 18 percent. For the twelve months ended June 30, 2004, Semiconductor Industry Association data showed a 22 percent growth in semiconductor industry revenues for the business in which we operate, while our total revenues increased by 23 percent during this period. Royalties contributed $41.9 million to revenues, compared to $42.0 million in fiscal 2003.

Revenues from our Focus Products increased by 25 percent compared to the prior fiscal year. These revenues comprised 69 percent of total revenues for the fiscal year ended June 30, 2004, compared to 68 percent for fiscal year 2003.

Revenues as of percentage of total product revenues based on sales locations, were approximately 30 percent, 46 percent and 24 percent for North America, Asia and Europe, respectively, for the fiscal year ended June 30, 2004. Revenues as a percentage of total product revenues were approximately 34 percent, 42 percent and 24 percent for North America, Asia and Europe, respectively, for the fiscal year ended June 30, 2003.

For the twelve months ended June 30, 2004 and 2003, gross profit was $411.1 million and $287.8 million (38.8 percent and 33.3 percent of revenues), respectively. The gross profit margin improvement reflected the sale of a higher margin mix of our Focus Products and manufacturing cost savings, including reduced material costs, increased yield and labor and overhead efficiencies. Gross margin in the prior year ended June 30, 2003, included a $6.0 million inventory charge to write-down raw material and work-in-process inventories impaired as a result of planned plant closures, which negatively impacted gross margin by 0.7 percent for that period.

34




Revenues and gross margin by reportable business segments for fiscal years ended June 30, 2004 and 2003 have been restated to conform with fiscal 2005 presentation of reportable segments, as follows (in thousands except percentages):

 

 

June 30, 2004

 

June 30, 2003

 

Business Segment

 

 

 

Revenues

 

Percentage
of Total

 

Gross
Margin

 

Revenues

 

Percentage
of Total

 

Gross
Margin

 

Computing and Communications (“C&C”)

 

$

328,330

 

 

31.0

%

 

 

40.6

%

 

$

222,276

 

 

25.7

%

 

 

34.0

%

 

Energy-Saving Products (“ESP”)

 

250,763

 

 

23.6

 

 

 

49.2

 

 

208,775

 

 

24.2

 

 

 

45.9

 

 

Aerospace and Defense (“A&D”)

 

108,610

 

 

10.2

 

 

 

37.4

 

 

110,979

 

 

12.8

 

 

 

37.5

 

 

Intellectual Property (“IP”)

 

41,927

 

 

4.0

 

 

 

100.0

 

 

41,988

 

 

4.9

 

 

 

100.0

 

 

Subtotal Focus Products

 

729,630

 

 

68.8

 

 

 

46.5

 

 

584,018

 

 

67.6

 

 

 

43.7

 

 

Commodity Products (“CP”)

 

217,856

 

 

20.5

 

 

 

25.7

 

 

179,318

 

 

20.7

 

 

 

11.8

 

 

Non-Aligned Products (“NAP”)

 

113,014

 

 

10.7

 

 

 

14.1

 

 

101,107

 

 

11.7

 

 

 

11.4

 

 

Subtotal Non-Focus Products

 

330,870

 

 

31.2

 

 

 

21.7

 

 

280,425

 

 

32.4