Annual Reports

 
Quarterly Reports

  • 10-Q (Oct 29, 2014)
  • 10-Q (May 1, 2014)
  • 10-Q (Jan 30, 2014)
  • 10-Q (Oct 31, 2013)
  • 10-Q (Apr 30, 2013)
  • 10-Q (Jan 29, 2013)

 
8-K

 
Other

International Rectifier 10-Q 2014

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Graphic
  7. Graphic
IRF-2013.12.29-10Q



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 29, 2013
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
(State or Other Jurisdiction of
 Incorporation or Organization)
95-1528961
(I.R.S. Employer
 Identification No.)
101 N. Sepulveda Blvd
El Segundo, California
 (Address of Principal Executive Offices)
90245
 (Zip Code)
Registrant's Telephone Number, Including Area Code: (310) 726-8000
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 ý  No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý   No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller
reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No ý
There were 71,255,116 shares of the registrant's common stock, par value $1.00 per share, outstanding on January 22, 2014.





TABLE OF CONTENTS
 
 
 
 
 



2


Note Regarding Forward-Looking Statements

This document contains "forward‑looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to expectations concerning matters that (a) are not historical facts, (b) predict or forecast future events or results, or (c) embody assumptions that may prove to have been inaccurate. These forward‑looking statements involve risks, uncertainties and assumptions. When we use words such as "believe," "expect," "anticipate," "will" or similar expressions, we are making forward‑looking statements. Although we believe that the expectations reflected in such forward‑looking statements are reasonable, we cannot give readers any assurance that such expectations will prove correct. The actual results may differ materially from those anticipated in the forward‑looking statements as a result of numerous factors, many of which are beyond our control. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to, the factors discussed in the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." All forward‑looking statements attributable to us are expressly qualified in their entirety by the factors that may cause actual results to differ materially from anticipated results. Readers are cautioned not to place undue reliance on these forward‑looking statements, which reflect our opinion only as of the date hereof. We undertake no duty or obligation to revise these forward‑looking statements. Readers should carefully review the risk factors described in this document as well as in other documents we file from time to time with the Securities and Exchange Commission ("SEC").


3


PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

 
Three Months Ended
 
Six Months Ended
 
December 29, 2013
 
December 23, 2012
 
December 29, 2013
 
December 23, 2012
Revenues
$
269,965

 
$
223,822

 
$
539,715

 
$
476,314

Cost of sales
172,000

 
174,733

 
346,439

 
356,684

Gross profit
97,965

 
49,089

 
193,276

 
119,630

 
 
 
 
 
 
 
 
Selling, general and administrative expense
44,727

 
45,083

 
88,477

 
92,378

Research and development expense
32,786

 
32,125

 
64,959

 
65,574

Amortization of acquisition‑related intangible assets
1,630

 
1,680

 
3,260

 
3,360

Asset impairment, restructuring and other charges
1,015

 
4,941

 
2,417

 
13,907

Operating income (loss)
17,807

 
(34,740
)
 
34,163

 
(55,589
)
Other expense, net
1,510

 
411

 
2,272

 
1,419

Interest expense (income), net
7

 
(8
)
 
6

 
(40
)
Income (loss) before income taxes
16,290

 
(35,143
)
 
31,885

 
(56,968
)
Provision for (benefit from) income taxes
(1,631
)
 
(2,421
)
 
5,241

 
4,529

Net income (loss)
$
17,921

 
$
(32,722
)
 
$
26,644

 
$
(61,497
)
 
 
 
 
 
 
 
 
Net income (loss) per common share:
 
 
 
 
 
 
 
Basic
$
0.25

 
$
(0.47
)
 
$
0.38

 
$
(0.89
)
Diluted
$
0.25

 
$
(0.47
)
 
$
0.37

 
$
(0.89
)
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
71,147

 
69,144

 
70,988

 
69,213

Diluted
72,163

 
69,144

 
71,885

 
69,213


The accompanying notes are an integral part of these financial statements.

4


INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

 
Three Months Ended
 
Six Months Ended
 
December 29, 2013
 
December 23, 2012
 
December 29, 2013
 
December 23, 2012
Net income (loss)
$
17,921

 
$
(32,722
)
 
$
26,644

 
$
(61,497
)
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax effect of $0 for all periods presented
5,187

 
(601
)
 
20,365

 
10,631

Unrealized gains (losses) on securities:
 
 
 
 
 
 
 
Unrealized holding gains (losses) on available-for-sale securities, net of tax effect of $0 for all periods presented
5,937

 
1,367

 
9,089

 
(1,837
)
Other comprehensive income
11,124

 
766

 
29,454

 
8,794

Comprehensive income (loss)
$
29,045

 
$
(31,956
)
 
$
56,098

 
$
(52,703
)

The accompanying notes are an integral part of these financial statements.


5


INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 
December 29, 2013
 
June 30, 2013 (1)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
498,487

 
$
443,490

Restricted cash
635

 
611

Short-term investments
5,001

 
11,056

Trade accounts receivable, net of allowances
156,730

 
137,762

Inventories
247,740

 
232,315

Current deferred tax assets
4,946

 
4,948

Prepaid expenses and other current assets
34,222

 
33,002

Total current assets
947,761

 
863,184

Restricted cash
739

 
738

Property, plant and equipment, net
412,277

 
423,338

Goodwill
52,149

 
52,149

Acquisition‑related intangible assets, net
18,663

 
21,923

Long-term deferred tax assets
29,108

 
32,792

Other assets
65,135

 
59,088

Total assets
$
1,525,832

 
$
1,453,212

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
86,403

 
$
89,312

Accrued income taxes
4,361

 
949

Accrued salaries, wages and commissions
37,764

 
39,719

Other accrued expenses
80,063

 
78,414

Total current liabilities
208,591

 
208,394

Long-term deferred tax liabilities
9,723

 
8,970

Other long-term liabilities
16,876

 
24,530

Total liabilities
235,190

 
241,894

Commitments and contingencies


 


Stockholders’ equity:
 
 
 
Common shares
77,426

 
76,590

Capital contributed in excess of par value
1,090,231

 
1,067,841

Treasury stock, at cost
(113,175
)
 
(113,175
)
Retained earnings
228,509

 
201,865

Accumulated other comprehensive income (loss)
7,651

 
(21,803
)
Total stockholders’ equity
1,290,642

 
1,211,318

Total liabilities and stockholders’ equity
$
1,525,832

 
$
1,453,212


(1)
Amounts derived from the audited financial statements at June 30, 2013.

The accompanying notes are an integral part of these financial statements.

6


INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
 
Six Months Ended
 
December 29, 2013
 
December 23, 2012
Cash flows from operating activities:
 
 
 
Net income (loss)
$
26,644

 
$
(61,497
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
43,543

 
45,775

Amortization of acquisition‑related intangible assets
3,260

 
3,360

Loss on disposal of fixed assets
70

 
4,099

Impairment of long-lived assets

 
2,376

Stock compensation expense
13,489

 
11,117

Gain on sale of investments
(36
)
 
(8
)
Provision for bad debts

 
2

Provision for inventory write‑downs
935

 
11,395

Loss on derivatives
987

 
2,117

Deferred income taxes
6,946

 
5,584

Changes in operating assets and liabilities, net
(38,072
)
 
25,608

Other
457

 
(1,464
)
Net cash provided by operating activities   
58,223

 
48,464

Cash flows from investing activities:
 
 
 
Additions to property, plant and equipment
(22,632
)
 
(48,040
)
Proceeds from sale of property, plant and equipment
25

 
118

Sales of investments
36

 
52,131

Maturities of investments
6,000

 
21,500

Purchases of investments

 
(9,979
)
Release from (addition to) restricted cash
12

 
(13
)
Net cash provided by (used in) investing activities   
(16,559
)
 
15,717

Cash flows from financing activities:
 
 
 
Proceeds from exercise of stock options
10,897

 
987

Purchase of treasury stock

 
(5,210
)
Net settlement of restricted stock units for tax withholdings
(1,160
)
 
(1,025
)
Net cash provided by (used in) financing activities   
9,737

 
(5,248
)
Effect of exchange rate changes on cash and cash equivalents
3,596

 
2,300

Net increase in cash and cash equivalents
54,997

 
61,233

Cash and cash equivalents, beginning of period   
443,490

 
305,423

Cash and cash equivalents, end of period   
$
498,487

 
$
366,656


The accompanying notes are an integral part of these financial statements.


7


INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Business, Basis of Presentation and Summary of Significant Accounting Policies

Business

International Rectifier Corporation ("IR" or the "Company") designs, manufactures and markets power management semiconductors.  Power management semiconductors address the core challenges of power management, power performance and power conservation, by increasing system efficiency, allowing more compact end-products, improving features on electronic devices and prolonging battery life.
Power semiconductors convert raw power from an electrical outlet, a battery, an alternator running off an internal combustion engine, a hybrid electric vehicle ("HEV") or electric vehicle ("EV"), or other renewable energy sources 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 worldwide proliferation of electronic features in information technology, industrial, consumer, aerospace and defense and automotive products.
With the increasing demand for energy usage worldwide and generally rising energy costs, governments, businesses, and consumers alike are striving to conserve energy and demand more efficient uses of power in all types of electronic products including computers, appliances, military aircraft, and hybrid cars. The information technology, industrial, computing, consumer, high reliability and automobile industries use power management semiconductors to promote energy efficiency and improve product and device performance metrics.  Power management semiconductors enable energy savings by delivering the power tailored for a particular electrical device, rather than delivering a constant stream of power.
The Company's products include power metal oxide semiconductor field effect transistors ("MOSFETs"), high voltage analog and mixed signal integrated circuits ("HVICs"), low voltage analog and mixed signal integrated circuits ("LVICs"), digital integrated circuits ("ICs"), radiation‑resistant ("RAD-Hard") power MOSFETs, insulated gate bipolar transistors ("IGBTs"), high reliability DC-DC converters, digital controllers, integrated power modules, and automotive product packages.
Basis of Presentation

The condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"), and therefore do not include all information and notes normally provided in audited financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The condensed consolidated financial statements include the accounts of the Company and its subsidiaries, which are located in North America, Europe and Asia. Intercompany balances and transactions have been eliminated in consolidation.
In the opinion of management, all adjustments (consisting of normal recurring accruals and other adjustments) considered necessary for a fair presentation of the Company's results of operations, financial position, and cash flows have been included.  The results of operations for the interim periods presented are not necessarily comparable to the results of operations for any other interim period or indicative of the results that will be recorded for the full fiscal year ending June 29, 2014. These condensed consolidated financial statements and the accompanying notes should be read in conjunction with the Company's annual consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2013 filed with the SEC on August 20, 2013 (the "2013 Annual Report").
Fiscal Year and Quarter

The Company operates on a 52-53 week fiscal year with the fiscal year ending on the last Sunday in June. The three months ended December 2013 and 2012 each consisted of 13 weeks ending on December 29, 2013 and December 23, 2012, respectively. The six months ended December 2013 and 2012 each consisted of 26 weeks ending on December 29, 2013 and December 23, 2012, respectively. The current fiscal year will consist of 52 weeks and end on June 29, 2014.


8

INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. Business, Basis of Presentation and Summary of Significant Accounting Policies (Continued)


Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported revenues and expenses during the reporting period. Actual results may differ from those estimates.


Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are categorized based on whether or not the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is broken down into three levels, defined as follows:

Level 1—Inputs are based on quoted market prices for identical assets or liabilities in active markets at the measurement date.
Level 2—Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly.
Level 3—Inputs include management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the valuation.

The financial assets and liabilities which are measured and recorded at fair value on a recurring basis are included within the following items on the Company’s consolidated balance sheet as of December 29, 2013 and June 30, 2013 (in thousands):
 
As of December 29, 2013
Assets and Liabilities:
Total
 
Level 1
 
Level 2
 
Level 3
Short-term investments
$
5,001

 
$
5,001

 
$

 
$

Other assets
38,656

 
36,726

 

 
1,930

Other accrued expenses
(10
)
 

 
(10
)
 

Other long-term liabilities
(9,370
)
 
(9,370
)
 

 

Total
$
34,277

 
$
32,357

 
$
(10
)
 
$
1,930


 
As of June 30, 2013
Assets and Liabilities:
Total
 
Level 1
 
Level 2
 
Level 3
Short-term investments
$
11,056

 
$
6,004

 
$
5,052

 
$

Prepaid expenses and other current assets
19

 

 
19

 

Other assets
29,725

 
26,837

 

 
2,888

Other long-term liabilities
(8,326
)
 
(8,326
)
 

 

Total
$
32,474

 
$
24,515

 
$
5,071

 
$
2,888


The Company considers as cash and cash equivalents all investments that are highly liquid with an initial maturity of three months or less from the date of purchase.
The fair value of investments, derivatives, and other assets and liabilities are disclosed in Note 2, Note 3, and Note 9, respectively.

9

INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. Business, Basis of Presentation and Summary of Significant Accounting Policies (Continued)


The Company determines at the end of the reporting period whether a given financial asset or liability is valued using Level 1, 2, or 3 inputs. During each of the three and six months ended December 29, 2013 and December 23, 2012, there were no transfers between Level 1, Level 2, and Level 3 assets and liabilities.  The Company records its foreign currency forward contracts at fair value using Level 2 inputs based on readily observable market parameters for all substantial terms.

Level 3 Valuations

The following tables provide a reconciliation of the beginning and ending balance of items measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended December 29, 2013 and December 23, 2012 (in thousands):

 
Level 3
 
Assets
 
Derivatives
Beginning balance at September 29, 2013
$
2,563

Total losses (realized or unrealized) included in other expense, net
(633
)
Ending balance at December 29, 2013
$
1,930


 
Level 3
 
Assets
 
Derivatives
Beginning balance at September 23, 2012
$
2,920

Total gains (realized or unrealized) included in other expense, net
116

Ending balance at December 23, 2012
$
3,036



10

INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. Business, Basis of Presentation and Summary of Significant Accounting Policies (Continued)


The following tables provide a reconciliation of the beginning and ending balance of items measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended December 29, 2013 and December 23, 2012 (in thousands):

 
Level 3
 
Assets
 
Derivatives
Beginning balance at June 30, 2013
$
2,888

Total losses (realized or unrealized) included in other expense, net
(958
)
Ending balance at December 29, 2013
$
1,930


 
Level 3
 
Assets
 
Derivatives
Beginning balance at June 24, 2012
$
2,834

Total gains (realized or unrealized) included in other expense, net
202

Ending balance at December 23, 2012
$
3,036


When at least one significant valuation model assumption or input used to measure the fair value of financial assets or liabilities is unobservable in the market, they are deemed to be measured using Level 3 inputs. These Level 3 inputs may include pricing models, discounted cash flow methodologies or similar techniques where at least one significant model assumption or input is unobservable. The Company uses Level 3 inputs to value a non-transferable put option on a strategic investment (the “Put Option”).

The Company accounts for the Put Option as a derivative instrument not designated as an accounting hedge. The fair value was determined using the Black-Scholes option pricing model. The model uses inputs such as exercise price, fair market value of the underlying common stock, expected life (years), expected volatility, risk-free rate equivalent, and dividend yield. The expected life is the remaining life of the Put Option. Expected volatility is based on historical volatility of the underlying common stock. As of December 29, 2013, the Company determined that significant changes in the above assumptions would not materially affect the fair value of the Put Option. Additionally, the model relies on the material assumption that the issuer of the Put Option will uphold its financial obligation up to its common equity value should the Company exercise the Company’s right to put the associated number of common shares back to the issuer at a fixed price in local currency.


Non-Recurring Fair Value Measurements

During the three and six months ended December 29, 2013, the Company did not record any other-than-temporary impairments on financial assets required to be measured at fair value on a nonrecurring basis. For the three months ended December 23, 2012, the Company measured at fair value, on a non-recurring basis, the carrying values of certain of its equipment in its research and development group, as well as its Newport, Wales, and Mexico manufacturing facilities due to the non-use of that equipment. The Company determined that the carrying values of those assets of $8.7 million exceeded their estimated fair values of $4.0 million. The fair values were determined using the market approach, which considered the estimated fair value of the equipment using significant unobservable inputs (Level 3) obtained from third party equipment brokerage firms. Consequently, during the three and six months ended December 23, 2012, the Company recorded an impairment charge of $4.7 million, which represented the excess of the carrying values of the assets over the fair values, less the estimated cost to sell.

11

INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. Business, Basis of Presentation and Summary of Significant Accounting Policies (Continued)


Adoption of Recent Accounting Standards

In February 2013, the FASB issued ASC update No. 2013-02, “Comprehensive Income (Topic 220), Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (ASC 2013-02). This update requires companies to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, a company is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. The amendments in this update are effective for fiscal years and interim periods within those years beginning after December 15, 2012. The adoption of this update did not have a material impact on the Company's financial statements, and additional disclosure pursuant to this update is presented in Note 10.


Recent Accounting Standards

In July 2013, the FASB issued ASC update No. 2013-11, "Income Taxes (Topic 740), Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" (ASU 2013-11). Under the amendments in this update, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. The amendments in this update are effective for fiscal years and interim periods within those years beginning after December 15, 2013. The Company does not believe that adoption of this update will have a material impact on its financial statements.


12

INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. Investments


Available-for-sale investments are carried at fair value, inclusive of unrealized gains and losses, and net of discount accretion and premium amortization computed using the level yield method. Net unrealized gains and losses are included in other comprehensive income (loss) net of applicable income taxes. Gains or losses on sales of available-for-sale investments are recognized using the first-in, first-out method and are included in other expense (income) or interest expense (income) depending upon the type of security.

Available-for-sale securities as of December 29, 2013 are summarized as follows (in thousands):
 
Amortized Costs
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Net Unrealized Gain
 
Market Value
Short-Term Investments:
 
 
 
 
 
 
 
 
 
U.S. government and agency obligations
$
4,999

 
$
2

 
$

 
$
2

 
$
5,001

Total short-term investments
$
4,999

 
$
2

 
$

 
$
2

 
$
5,001

 
 
 
 
 
 
 
 
 
 
Equity securities
$
11,631

 
$
14,870

 
$

 
$
14,870

 
$
26,501


Available-for-sale securities as of June 30, 2013 are summarized as follows (in thousands):
 
Amortized Costs
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Net Unrealized Gain
 
Market Value
Short-Term Investments:
 
 
 
 
 
 
 
 
 
Corporate debt
$

 
$
40

 
$

 
$
40

 
$
40

U.S. government and agency obligations
11,007

 
9

 

 
9

 
11,016

Total short-term investments
$
11,007

 
$
49

 
$

 
$
49

 
$
11,056

 
 
 
 
 
 
 
 
 
 
Equity securities
$
11,631

 
$
5,739

 
$
(5
)
 
$
5,734

 
$
17,365

    
The Company's investment policy is to manage its total cash and investments balances to preserve principal and maintain liquidity while achieving market returns on the investment portfolio.

The Company also holds as strategic investments the common stock of three publicly traded foreign companies. The common stock of the three companies is shown as “Equity securities” in the table above and is included in other assets on the consolidated balance sheets. The common shares of the publicly traded companies are traded on either the Tokyo Stock Exchange or the Taiwan Stock Exchange. The Company holds an option on one of the strategic investments to put the associated number of common shares back to the issuer at a fixed price in local currency (which is described as the “Put Option” in Note 1). The Put Option became effective September 1, 2009 and is reported at fair value. As of December 29, 2013, the fair value of the Put Option was $1.9 million, with changes in fair value recorded in other expense, net (See Note 3, “Derivative Financial Instruments”). The Company received no dividend income from these investments for each of the three months ended December 29, 2013 and December 23, 2012, and $0.1 million in dividend income for each of the six months ended December 29, 2013 and December 23, 2012.

The Company evaluates securities for other-than-temporary impairment on a quarterly basis. Impairment is evaluated considering numerous factors, and their relative significance varies depending on the situation. Factors considered include the length of time and extent to which the market value has been less than cost, the financial condition and near-term prospects of the issuer of the securities, and the intent and ability of the Company to retain the security in order to allow for an anticipated recovery in fair value. If, based upon the analysis, it is determined that the impairment is other-than-temporary, the security is written down to fair value and a loss is recognized through earnings.

There were no other-than-temporary impairments recorded for the Company's investments during each of the three and six months ended December 29, 2013 and December 23, 2012.

13

INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. Investments (Continued)


Unrealized loss positions are measured and determined at each fiscal quarter end. There were no available-for-sale investments in a gross unrealized loss position as of December 29, 2013. The following table summarizes the fair value and gross unrealized losses related to available-for-sale investments, aggregated by type of investment and length of time that individual securities were held in a loss position as of June 30, 2013 (in thousands):

 
Securities held
in a loss position
for less than
12 months at
June 30, 2013
 
Securities held
in a loss position
for 12 months
or more at
June 30, 2013
 
Total in a loss position
at June 30, 2013
 
Market
Value
 
Gross
Unrealized
Losses
 
Market
Value
 
Gross
Unrealized
Losses
 
Market
Value
 
Gross
Unrealized
Losses
Equity Securities
$
1,052

 
$
(5
)
 
$

 
$

 
$
1,052

 
$
(5
)
Total
$
1,052

 
$
(5
)
 
$

 
$

 
$
1,052

 
$
(5
)


The amortized cost and estimated fair value of investments at December 29, 2013, by contractual maturity of investment, are as follows (in thousands):
Contractual Maturity
 
Amortized
Cost
 
Estimated
Market Value
Due in 1 year or less
 
$
4,999

 
$
5,001

Total investments
 
$
4,999

 
$
5,001


The Company may decide to dispose of securities prior to the contractual maturity date indicated in the table above.

During the three and six months ended December 29, 2013, the Company sold a de minimis amount of available-for-sale securities, and the related total proceeds and gross realized gains and (losses) were also de minimis. Available-for-sale securities were sold for total proceeds of $52.1 million during the three and six months ended December 23, 2012, and gross realized gains and (losses) were de minimis. The cost of marketable securities sold was determined by the first-in, first-out method.

Fair Value of Investments

The following tables present the balances of investments measured at fair value on a recurring basis, by type of investment (in thousands):
 
As of December 29, 2013
 
Total
 
Level 1
 
Level 2
 
Level 3
U.S. government and agency obligations
$
5,001

 
$
5,001

 
$

 
$

Equity securities-strategic investments
26,501

 
26,501

 

 

Total securities at fair value
$
31,502

 
$
31,502

 
$

 
$

 
As of June 30, 2013
 
Total
 
Level 1
 
Level 2
 
Level 3
Corporate debt
$
40

 
$

 
$
40

 
$

U.S. government and agency obligations
11,016

 
6,004

 
5,012

 

Equity securities-strategic investments
17,365

 
17,365

 

 

Total securities at fair value
$
28,421

 
$
23,369

 
$
5,052

 
$



14

INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. Derivative Financial Instruments


The Company is exposed to financial market risks, including fluctuations in interest rates, foreign currency exchange rates and market value risk related to its investments. The Company uses derivative financial instruments primarily to mitigate foreign exchange rate risks, but also as part of its strategic investment program. In the normal course of business, the Company also faces risks that are either non-financial or non-quantifiable. Such risks principally include country risk, credit risk and legal risk, and are not discussed or quantified in the following analysis. As of December 29, 2013, the Company’s only derivatives were currency forward contracts which were not designated as accounting hedges, the Put Option (See Note 2, “Investments”), and a call option on the equity of a private domestic company. The private domestic company is a development stage entity, and as such, the Company is unable to determine the fair value of the call option at this time.

Interest Rates

The Company is subject to interest rate risk through its investments. The objectives of the Company’s investments in debt securities are to preserve principal and maintain liquidity while achieving market returns on the investment portfolio. To achieve these objectives, the returns on the Company’s investments in short-term debt generally will be compared to LIBOR or to yields on money market instruments such as U.S. commercial paper programs and U.S. Treasury Bills.

Foreign Currency Exchange Rates

A significant amount of the Company's revenues, expense, and capital purchasing transactions are conducted on a global basis in several foreign currencies. To protect against exposure to currency exchange rate fluctuations, the Company has established a balance sheet transaction risk hedging program. Through this hedging program, the Company seeks to reduce, but does not eliminate, the impact of currency exchange rate movements.

The Company generally hedges the risks of foreign currency-denominated working capital positions with offsetting foreign currency-denominated exchange transactions, using currency forward contracts or spot transactions.  Transaction gains and losses on these foreign currency-denominated working capital positions are generally offset by corresponding gains and losses on the related hedging instruments, usually resulting in reduced net exposure. At various times, the Company has currency exposure related to the British Pound Sterling, the Euro, and the Japanese Yen.  For example, in the United Kingdom, the Company has a sales office and a semiconductor wafer fabrication facility with revenues in U.S. Dollars and Euros, and expenses in British Pounds Sterling and U.S. Dollars. The Company does not hedge its revenues and expenses against changes in foreign currency exchange rates, as it does not perceive the net risk of changes to translated revenues and expenses from changes in exchange rates as significant enough at this time to justify hedging.

For its balance sheet transaction risk hedging program, the Company had approximately $24.1 million in notional amounts of forward contracts not designated as accounting hedges outstanding at December 29, 2013.  Net realized and unrealized foreign currency gains (losses) related to foreign currency forward contracts not designated as accounting hedges, recognized in earnings as a component of other expense, net, were $(0.1) million and $0.9 million for the three and six months ended December 29, 2013, respectively, and $0.3 million and $(2.1) million for the three and six months ended December 23, 2012, respectively.


15

INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. Derivative Financial Instruments (Continued)


At December 29, 2013 and June 30, 2013, the fair value carrying amounts of the Company’s derivative instruments were as follows (in thousands):
 
December 29, 2013
 
Derivative Assets
 
Derivative Liabilities
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value

Put Option

Other assets
 
$
1,930

 
 
 
 
Currency forward contracts
 
 
 
 
Other accrued expenses
 
$
10

Total
 
 
$
1,930

 
 
 
$
10


 
June 30, 2013
 
Derivative Assets
 
Balance Sheet Location
 
Fair Value

Put Option

Other assets
 
$
2,888

Currency forward contracts
Prepaid expenses and other current assets
 
19

Total
 
 
$
2,907


The gain (loss) recognized in earnings as a component of other expense, net, for the Company’s derivatives not designated as hedging instruments during the three and six months ended December 29, 2013 and December 23, 2012 was comprised of the following (in thousands):
 
Three Months Ended
 
Six Months Ended
 
December 29, 2013
 
December 23, 2012
 
December 29, 2013
 
December 23, 2012
Put Option
$
(633
)
 
$
116

 
$
(958
)
 
$
202

Currency forward contracts
(85
)
 
285

 
865

 
(2,144
)
Total
$
(718
)
 
$
401

 
$
(93
)
 
$
(1,942
)


16

INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. Derivative Financial Instruments (Continued)

Fair Value

The following tables present derivative instruments measured at fair value on a recurring basis as of December 29, 2013 and June 30, 2013 (in thousands):
 
December 29, 2013
 
Total
 
Level 1
 
Level 2
 
Level 3
Put Option
$
1,930

 
$

 
$

 
$
1,930

Foreign currency derivatives:
 
 
 
 
 
 
 
Liabilities
(10
)
 

 
(10
)
 

Total derivative instruments at fair value, net
$
1,920

 
$

 
$
(10
)
 
$
1,930


 
June 30, 2013
 
Total
 
Level 1
 
Level 2
 
Level 3
Put Option
$
2,888

 
$

 
$

 
$
2,888

Foreign currency derivatives:
 
 
 
 
 
 
 
Assets
19

 

 
19

 

Total derivative instruments at fair value
$
2,907

 
$

 
$
19

 
$
2,888



4. Supplemental Cash Flow Disclosures

Components of the changes in operating assets and liabilities during the six months ended December 29, 2013 and December 23, 2012 were comprised of the following (in thousands):
 
Six Months Ended
 
December 29, 2013
 
December 23, 2012
Trade accounts receivable
$
(18,392
)
 
$
34,979

Inventories
(13,514
)
 
24,265

Prepaid expenses and other current assets
1,818

 
(255
)
Accounts payable
(3,706
)
 
(10,727
)
Accrued salaries, wages and commissions
(2,288
)
 
(175
)
Deferred compensation
402

 
(465
)
Accrued income taxes
4,266

 
(4,441
)
Other accrued expenses
(6,658
)
 
(17,573
)
Changes in operating assets and liabilities
$
(38,072
)
 
$
25,608




5. Inventories

At December 29, 2013 and June 30, 2013, inventories were comprised of the following (in thousands):
 
December 29, 2013
 
June 30, 2013
Raw materials
$
56,370

 
$
58,471

Work-in-process
113,912

 
97,158

Finished goods
77,458

 
76,686

Total inventories
$
247,740

 
$
232,315


17

INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. Goodwill and Acquisition-Related Intangible Assets


At December 29, 2013 and June 30, 2013, acquisition‑related intangible assets included the following (in thousands):
 
 
 
December 29, 2013
 
Amortization Periods
(Years)
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net
Completed technology
4 - 12
 
$
52,045

 
$
(41,467
)
 
$
10,578

Customer lists
5 - 12
 
10,430

 
(7,738
)
 
2,692

Intellectual property and other
2 - 15
 
16,763

 
(11,370
)
 
5,393

Total acquisition‑related intangible assets
 
 
$
79,238

 
$
(60,575
)
 
$
18,663


 
 
 
June 30, 2013
 
Amortization Periods
(Years)
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net
Completed technology
4 - 12
 
$
52,045

 
$
(39,163
)
 
$
12,882

Customer lists
5 - 12
 
10,430

 
(7,313
)
 
3,117

Intellectual property and other
2 - 15
 
16,763

 
(10,839
)
 
5,924

Total acquisition‑related intangible assets
 
 
$
79,238

 
$
(57,315
)
 
$
21,923


As of December 29, 2013, the following table represents the total estimated amortization of intangible assets for the remainder of fiscal year 2014 and the five succeeding fiscal years (in thousands):
 
 
 
Fiscal Year
 
Total
 
2014
 
2015
 
2016
 
2017
 
2018
 
2019 and thereafter
Estimated amortization expense
$
18,663

 
$
3,160

 
$
6,220

 
$
4,681

 
$
1,463

 
$
897

 
$
2,242


Goodwill
The Company evaluates the carrying value of goodwill annually during the fourth quarter of each fiscal year and more frequently if it believes indicators of impairment exist.  In evaluating goodwill, a two-step goodwill impairment test is applied to each reporting unit.  The Company identifies reporting units and determines the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill, to those reporting units.  In the first step of the impairment test, the Company estimates the fair value of the reporting unit.  If the fair value of the reporting unit is less than the carrying value of the reporting unit, the Company performs the second step which compares the implied fair value of the reporting unit with the carrying amount of the reporting unit and writes down the carrying amount of the goodwill to the implied fair value.

At December 29, 2013 and June 30, 2013, the carrying amount of goodwill by reportable segment was as follows (in thousands):
Business Segments:
December 29, 2013
 
June 30, 2013
Energy Saving Products
$
33,190

 
$
33,190

HiRel
18,959

 
18,959

Total goodwill
$
52,149

 
$
52,149



18

INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. Revolving Credit Facility and Bank Letters of Credit


Revolving Credit Facility

On October 25, 2012, the Company entered into a Credit Agreement (the “Credit Agreement”), as borrower, with Wells Fargo Bank, National Association, as Administrative Agent (“Agent”), and certain lenders (the “Lenders”), pursuant to which it established a senior unsecured revolving credit facility (the “Credit Facility”) in an aggregate principal amount of $100 million with sublimits for swingline loans (of $25 million) and the issuance of letters of credit (of $10 million). The Credit Facility matures on October 25, 2016. The proceeds of the Credit Facility may be used by the Company to finance certain capital expenditures and acquisitions permitted thereunder, to provide for the working capital and general corporate needs as well as to pay fees, commissions and expenses associated with the Credit Facility.

The terms of the Credit Agreement require the Company to comply with certain financial tests, and include various affirmative and negative covenants, representations and warranties, conditions and events of default. Additionally, the Credit Facility is subject to a commitment fee on the unused portion at an initial rate equal to 0.25 percent per annum. As of December 29, 2013, the Company was in compliance with the financial covenants, and there were no amounts outstanding under the Credit Facility.

Bank Letters of Credit

At December 29, 2013, the Company had $0.7 million of outstanding letters of credit. These letters of credit are secured by cash collateral provided by the Company equal to their face amount.


8. Other Accrued Expenses

At December 29, 2013 and June 30, 2013, other accrued expenses were comprised of the following (in thousands):
 
December 29, 2013
 
June 30, 2013
Sales returns
$
35,418

 
$
33,902

Accrued accounting and legal costs
10,421

 
8,108

Deferred revenue
11,826

 
9,678

Accrued warranty
1,787

 
1,992

Accrued utilities
2,320

 
2,516

Accrued repurchase obligation
2,553

 
4,759

Accrued sales and other taxes
4,927

 
3,053

Accrued subcontractor costs
1,384

 
1,307

Accrued rent
4,331

 
4,858

Other
5,096

 
8,241

    Total other accrued expenses
$
80,063

 
$
78,414



Warranty

The Company records warranty liabilities at the time of sale for the estimated costs to be incurred under the terms of its warranty agreements. The specific warranty terms and conditions vary depending upon product sold and the country in which the Company does business. In general, for standard products, the Company will replace defective parts not meeting the Company’s published specifications at no cost to the customers. Factors that affect the liability include historical and anticipated failure rates of products sold, and cost per claim to satisfy the warranty obligation. If actual results differ from the estimates, the Company revises its estimated warranty liability to reflect such changes.


19

INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. Other Accrued Expenses (Continued)


The following table details the changes in the Company’s warranty reserve for the six months ended December 29, 2013, which is included in other accrued liabilities in the schedule above (in thousands):
Accrued warranty, June 30, 2013
$
1,992

Accruals for warranties issued during the period
1,193

Changes in estimates related to pre-existing warranties
13

Warranty claim settlements
(1,411
)
Accrued warranty, December 29, 2013
$
1,787



9. Other Long-Term Liabilities

At December 29, 2013 and June 30, 2013, other long-term liabilities were comprised of the following (in thousands):
 
December 29, 2013
 
June 30, 2013
Income taxes payable
$
3,346

 
$
12,344

Deferred compensation
11,012

 
9,903

Other
2,518

 
2,283

    Total other long-term liabilities
$
16,876

 
$
24,530


Fair Value of Long-term Liabilities

The following tables present the long-term liabilities and the related assets measured at fair value on a recurring basis as of December 29, 2013 and June 30, 2013 (in thousands):
 
December 29, 2013
 
Total
 
Level 1
 
Level 2
 
Level 3
Employee deferred compensation plan liability
$
9,370

 
$
9,370

 
$

 
$

Assets of employee deferred compensation plan (reported in other assets)
10,225

 
10,225

 

 

 
June 30, 2013
 
Total
 
Level 1
 
Level 2
 
Level 3
Employee deferred compensation plan liability
$
8,326

 
$
8,326

 
$

 
$

Assets of employee deferred compensation plan (reported in other assets)
9,472

 
9,472

 

 



20

INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. Changes in Accumulated Other Comprehensive Income (Loss)


The following table details the changes in the Company’s accumulated other comprehensive income (loss) balance for the six months ended December 29, 2013 (net of tax effect of $0, in thousands):
 
 
 
Foreign Currency Translation Adjustments
 
Unrealized
gain (loss) on
available-for-sale securities
 
Total
Balance at June 30, 2013
 
$
(22,266
)
 
$
463

 
$
(21,803
)
Other comprehensive income before reclassifications
 
20,365

 
9,125

 
29,490

Amounts reclassified from accumulated other comprehensive income (loss)
 

 
(36
)
 
(36
)
Net other comprehensive income
 
$
20,365

 
$
9,089

 
$
29,454

Balance at December 29, 2013
 
$
(1,901
)
 
$
9,552

 
$
7,651


As a result of sales of available-for-sale securities, the Company reclassified a de minimis amount from accumulated other comprehensive income (loss) to earnings as a component of interest income, net, for the six months ended December 29, 2013. There were no amounts reclassified from accumulated other comprehensive income (loss) for the three months ended December 29, 2013, or for each of the three and six months ended December 23, 2012.


11. Stock‑Based Compensation

The Company issues new shares to fulfill the obligations under all of its stock‑based compensation awards.  Such shares are subject to registration under applicable securities laws, including the rules and regulations promulgated by the SEC, unless an applicable exemption applies.

During the six months ended December 29, 2013, the Company granted an aggregate of 4,000 stock options to Company employees under its 2011 Performance Incentive Plan (the "2011 Plan").  Subject to the terms and conditions of the 2011 Plan and applicable award documentation, such awards generally vest and become exercisable in equal installments over each of the first three anniversaries of the date of grant, with a maximum award term of five years.

The following table summarizes the stock option activity for the six months ended December 29, 2013 (in thousands, except per share price data):
 
Stock Option
Shares
 
Weighted
Average Option
Exercise Price
per Share
 
Weighted
Average Grant
Date Fair Value
per Share
 
Aggregate
Intrinsic Value
Outstanding, June 30, 2013
1,187

 
$
17.08

 
 
 
$
4,978

Granted
4

 
$
24.76

 
$
6.82

 
 
Exercised
(673
)
 
$
16.19

 
 
 
$
5,330

Expired or forfeited
(5
)
 
$
16.83

 
 
 
 
Outstanding, December 29, 2013
513

 
$
18.31

 
 
 
$
3,919


For the six months ended December 29, 2013 and December 23, 2012, the Company received proceeds of $10.9 million and $1.0 million, respectively, as a result of the exercise of stock options issued under its stock based compensation plans. There were no tax benefits realized from issuance of stock-based awards for each of the three and six months ended December 29, 2013 and December 23, 2012.


21

INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. Stock-Based Compensation (Continued)


During the six months ended December 29, 2013, the Company granted 25,050 Restricted Stock Units ("RSUs") to employees, and 43,704 RSUs to members of the Board of Directors (the "Board"), in each case under the 2011 Plan. The RSUs provided for vesting over a period of service, subject to the terms and conditions of the 2011 Plan and the applicable award documentation. For the RSU awards made to employees, the vesting of awards generally takes place in equal installments over each of the first three anniversaries of the date of grant. The RSU awards made to members of the Board were made as part of the Board’s annual director compensation program, under which the vesting of RSU awards takes place generally on the first anniversary of the date of grant.

The following table summarizes the RSU activity for the six months ended December 29, 2013 (in thousands, except per share price data):

 
Restricted Stock
Units
 
Weighted Average
 Grant Date
Fair Value Per Share
 
Aggregate
Intrinsic Value
Outstanding, June 30, 2013
3,696

 
$
21.31

 
$
77,394

Granted
69

 
$
24.73

 
 
Vested
(215
)
 
$
18.99

 
$
4,901

Expired or forfeited
(94
)
 
$
22.08

 
 
Outstanding, December 29, 2013
3,456

 
$
21.51

 
$
88,288


The Company's stock-based compensation plans permit the reduction of a participant’s RSUs for purposes of settling a participant’s income tax withholding obligation. During the six months ended December 29, 2013, the Company withheld RSUs representing 52,516 underlying shares to fund participant income tax withholding obligations.

Additional information relating to the Company’s stock based compensation plans, including employee stock options and RSUs at December 29, 2013 and June 30, 2013 is as follows (in thousands):
 
December 29, 2013
 
June 30, 2013
Outstanding options exercisable
377

 
1,039

Options and RSUs available for grant
6,079

 
6,040

Total reserved common stock shares for stock option plans
10,048

 
10,923


Forfeitures are estimated at the time of grant. Based on the Company’s historical exercise and termination data, a four percent forfeiture rate is assumed for the majority of the options and RSUs.

For the three and six months ended December 29, 2013 and December 23, 2012, stock‑based compensation expense associated with the Company’s stock options and RSUs was as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
December 29, 2013
 
December 23, 2012
 
December 29, 2013
 
December 23, 2012
Cost of sales
$
1,362

 
$
1,123

 
$
2,610

 
$
2,281

Selling, general and administrative expense
3,123

 
2,858

 
6,650

 
6,018

Research and development expense
2,142

 
1,397

 
4,229

 
2,818

Total stock‑based compensation expense
$
6,627

 
$
5,378

 
$
13,489

 
$
11,117



22

INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. Stock-Based Compensation (Continued)

The total unrecognized compensation expense for outstanding stock options and RSUs was $39.8 million as of December 29, 2013. The weighted average number of years to recognize the total compensation expense for stock options and RSUs are 1.8 and 1.7, respectively.

The fair value of the stock options associated with the above compensation expense for the six months ended December 29, 2013 and December 23, 2012 was determined at the grant date using the Black‑Scholes option pricing model with the following weighted average assumptions:
 
December 29, 2013
 
December 23, 2012
Expected life
3.5 years

 
3.5 years

Risk free interest rate
0.70
%
 
0.36
%
Volatility
36.37
%
 
39.30
%
Dividend yield
0.00
%
 
0.00
%


12. Asset Impairment, Restructuring and Other Charges (Recoveries)

Asset impairment, restructuring and other charges reflect the impact of certain cost reduction programs and initiatives implemented by the Company. These programs and initiatives include the closing of facilities, the termination of employees and other related activities. Asset impairment, restructuring and other charges include program-specific exit costs, severance benefits pursuant to an ongoing benefit arrangement, and special termination benefits. Severance costs unrelated to the Company's restructuring initiatives are recorded as an element of cost of sales, research and development (“R&D”) or selling, general and administrative expense (“SG&A”), depending upon the classification and function of the employment position terminated. Restructuring costs are expensed during the period in which all requirements of recognition are met.

Asset write-downs are principally related to facilities and equipment that will not be used subsequent to the completion of exit or downsizing activities being implemented, and cannot be sold for amounts in excess of carrying value. In determining the asset groups for the purpose of calculating write-downs, the Company groups assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. In determining whether an asset is impaired, the Company evaluates estimated undiscounted future cash flows and other factors such as changes in strategy and technology. An impairment loss exists if the estimated undiscounted future cash flows are less than the carrying amount of the asset group. The Company then determines the fair value of the asset group by discounting the estimated future cash flows, consistent with the cash flows of a market participant, at a discount rate that is used when analyzing potential acquisitions. The Company then compares the fair value of the asset group with the carrying amount of the asset group and writes down the carrying amount of the asset group to its fair value.

During the first quarter of fiscal year 2013, the Company announced a restructuring plan to modify its manufacturing strategy and lower its operating expenses in order to align its cost structure with business conditions. As part of the plan, the Company has incurred and expects to further incur costs recorded in asset impairment, restructuring and other charges related primarily to the following:

Fiscal Year 2013 El Segundo Fabrication Facility Closure Initiative
Fiscal Year 2013 Newport Fabrication Facility Resizing Initiative
Fiscal Year 2013 Other Cost Reduction Activities Initiative (completed in fiscal year 2013)


23

INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. Asset Impairment, Restructuring and Other Charges (Recoveries) (Continued)


The following tables summarize the total asset impairment, restructuring and other charges (recoveries) by initiative for the three and six months ended December 29, 2013 and December 23, 2012 (in thousands):

 
Three Months Ended
Fiscal Year 2013 Initiatives
December 29, 2013
 
El Segundo
Fabrication Facility Closure Initiative
 
Newport Fabrication Facility Resizing Initiative
 
Other Cost Reduction Activities Initiative
 
Total
Reported in asset impairment, restructuring and other charges:
 
 
 
 
 
 
 
Asset impairment
$

 
$

 
$

 
$

Severance and workforce reduction costs (recoveries)
(9
)
 

 

 
(9
)
Decommissioning costs
&