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-2014.09.28-10Q



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2014
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 x  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 x   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 x
There were 71,638,967 shares of the registrant's common stock, par value $1.00 per share, outstanding on October 22, 2014.





TABLE OF CONTENTS
 
Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended September 28, 2014 and September 29, 2013
 
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended September 28, 2014 and September 29, 2013
 
Unaudited Condensed Consolidated Balance Sheets as of September 28, 2014 and June 29, 2014
 
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 28, 2014 and September 29, 2013
 



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
 
September 28, 2014
 
September 29, 2013
Revenues
$
286,988

 
$
269,750

Cost of sales
178,190

 
174,439

Gross profit
108,798

 
95,311

 
 
 
 
Selling, general and administrative expense
54,393

 
43,750

Research and development expense
34,392

 
32,173

Amortization of acquisition‑related intangible assets
1,555

 
1,630

Asset impairment, restructuring and related charges
499

 
1,402

Operating income
17,959

 
16,356

Other (income) expense, net
(13,319
)
 
762

Interest income, net
(12
)
 
(1
)
Income before income taxes
31,290

 
15,595

Provision for income taxes
5,360

 
6,872

Net income
$
25,930

 
$
8,723

 
 
 
 
Net income per common share:
 
 
 
Basic
$
0.36

 
$
0.12

Diluted
$
0.36

 
$
0.12

Weighted average common shares outstanding:
 
 
 
Basic
71,575

 
70,830

Diluted
72,973

 
71,664


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
 
September 28, 2014
 
September 29, 2013
Net income
$
25,930

 
$
8,723

Other comprehensive (loss) income, net of tax:
 
 
 
Foreign currency translation adjustments, net of tax effect of $0 for all periods presented
(14,244
)
 
15,179

Unrealized (losses) gains on securities:
 
 
 
Change in net unrealized holding (losses) gains on available-for-sale securities, net of tax effect of $0 for all periods presented
(13,186
)
 
3,152

Other comprehensive (loss) income
(27,430
)
 
18,331

Comprehensive (loss) income
$
(1,500
)
 
$
27,054


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


5


INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 
September 28, 2014
 
June 29, 2014 (1)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
658,989

 
$
588,922

Restricted cash
599

 
635

Short-term investments

 
20,114

Trade accounts receivable, net of allowances
145,153

 
161,723

Inventories
233,985

 
230,011

Current deferred tax assets
2,051

 
2,145

Prepaid expenses and other current assets
29,092

 
26,675

Total current assets
1,069,869

 
1,030,225

Restricted cash
737

 
739

Property, plant and equipment, net
377,687

 
391,765

Goodwill
52,149

 
52,149

Acquisition‑related intangible assets, net
13,948

 
15,503

Long-term deferred tax assets
29,039

 
31,183

Other assets
41,919

 
43,976

Total assets
$
1,585,348

 
$
1,565,540

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
91,808

 
$
86,256

Accrued income taxes
5,282

 
2,946

Accrued salaries, wages and commissions
47,699

 
47,750

Current deferred tax liabilities
346

 
348

Other accrued expenses
77,351

 
72,968

Total current liabilities
222,486

 
210,268

Long-term deferred tax liabilities
7,816

 
7,817

Other long-term liabilities
19,578

 
19,809

Total liabilities
249,880

 
237,894

Commitments and contingencies


 


Stockholders’ equity:
 
 
 
Common stock
78,311

 
78,192

Capital contributed in excess of par value
1,106,868

 
1,097,665

Treasury stock, at cost
(125,785
)
 
(125,785
)
Retained earnings
286,528

 
260,598

Accumulated other comprehensive (loss) income
(10,454
)
 
16,976

Total stockholders’ equity
1,335,468

 
1,327,646

Total liabilities and stockholders’ equity
$
1,585,348

 
$
1,565,540


(1)
Amounts derived from the audited financial statements at June 29, 2014.

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)
 
Three Months Ended
 
September 28, 2014
 
September 29, 2013
Cash flows from operating activities:
 
 
 
Net income
$
25,930

 
$
8,723

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
21,375

 
22,073

Amortization of acquisition‑related intangible assets
1,555

 
1,630

(Gain) loss on disposal of fixed assets
(7
)
 
15

Impairment of long-lived assets
1,157

 

Stock compensation expense
8,079

 
6,862

Gain on sale of investments
(12,997
)
 
(36
)
Provision for inventory write‑downs
3,971

 
1,615

(Gain) loss on derivatives
(186
)
 
362

Deferred income taxes
718

 
4,997

Changes in operating assets and liabilities, net
14,209

 
(21,194
)
Other
1,347

 
(237
)
Net cash provided by operating activities   
65,151

 
24,810

Cash flows from investing activities:
 
 
 
Additions to property, plant and equipment
(11,993
)
 
(11,918
)
Proceeds from sale of property, plant and equipment
11

 
25

Sales of investments
19,997

 
36

Maturities of investments

 
1,000

Release from restricted cash
15

 
8

Net cash provided by (used in) investing activities   
8,030

 
(10,849
)
Cash flows from financing activities:
 
 
 
Proceeds from exercise of stock options
1,401

 
8,972

Net settlement of restricted stock units for tax withholdings
(158
)
 
(1,089
)
Net cash provided by financing activities   
1,243

 
7,883

Effect of exchange rate changes on cash and cash equivalents
(4,357
)
 
2,786

Net increase in cash and cash equivalents
70,067

 
24,630

Cash and cash equivalents, beginning of period   
588,922

 
443,490

Cash and cash equivalents, end of period   
$
658,989

 
$
468,120


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, hybrid electric vehicle (“HEV”) or electric vehicle (“EV”), or a renewable energy source, 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 products 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 28, 2015. 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 29, 2014 filed with the SEC on August 20, 2014 (the "2014 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 September 2014 and 2013 each consisted of 13 weeks ending on September 28, 2014 and September 29, 2013, respectively. The current fiscal year will consist of 52 weeks and end on June 28, 2015.


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 September 28, 2014 and June 29, 2014 (in thousands):
 
As of September 28, 2014
Assets and Liabilities:
Total
 
Level 1
 
Level 2
 
Level 3
Other assets
$
20,821

 
$
19,137

 
$

 
$
1,684

Other accrued expenses
(28
)
 

 
(28
)
 

Other long-term liabilities
(9,890
)
 
(9,890
)
 

 

Total
$
10,903

 
$
9,247

 
$
(28
)
 
$
1,684


 
As of June 29, 2014
Assets and Liabilities:
Total
 
Level 1
 
Level 2
 
Level 3
Short-term investments
$
20,114

 
$
20,114

 
$

 
$

Prepaid expenses and other current assets
19

 

 
19

 

Other assets
20,461

 
19,010

 

 
1,451

Other long-term liabilities
(9,844
)
 
(9,844
)
 

 

Total
$
30,750

 
$
29,280

 
$
19

 
$
1,451


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 the three months ended September 28, 2014 and September 29, 2013, 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 September 28, 2014 and September 29, 2013 (in thousands):

 
Level 3
 
Assets
 
Derivatives
Beginning balance at June 29, 2014
$
1,451

Total gains (realized or unrealized) included in other (income) expense, net
233

Ending balance at September 28, 2014
$
1,684


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

Total losses (realized or unrealized) included in other (income) expense, net
(325
)
Ending balance at September 29, 2013
$
2,563



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)


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”). See Note 3 for more information.

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 September 28, 2014, 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.


Adoption of 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 adoption of this update did not have a material impact on the Company's financial statements.


Recent Accounting Standards

In May 2014, the FASB issued ASC updated No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" (ASU 2014-09). Under the amendments in this update, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in this update are effective for fiscal years and interim periods within those years beginning after December 15, 2016. Early adoption is not permitted. The new standard is required to be applied either retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of applying the update recognized at the date of initial application. The Company has not yet selected a transition method, and has not determined the impact that the new standard will have on its consolidated financial statements.


11

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 (income) expense, net or interest income, net depending upon the type of security.

Available-for-sale securities as of September 28, 2014 are summarized as follows (in thousands):
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Net Unrealized Gain
 
Market Value
Other Assets:
 
 
 
 
 
 
 
 
 
Equity securities
$
4,631

 
$
3,774

 
$

 
$
3,774

 
$
8,405


Available-for-sale securities as of June 29, 2014 are summarized as follows (in thousands):
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Net Unrealized Gain
 
Market Value
Short-Term Investments:
 
 
 
 
 
 
 
 
 
Equity securities
$
7,000

 
$
13,114

 
$

 
$
13,114

 
$
20,114

Other Assets:
 
 
 
 
 
 
 
 
 
Equity securities
$
4,631

 
$
3,845

 
$

 
$
3,845

 
$
8,476

    
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 two publicly traded foreign companies. The common stock of the two 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 September 28, 2014, the fair value of the Put Option was $1.7 million, with changes in fair value recorded in other (income) expense, net (See Note 3, “Derivative Financial Instruments”). There was no dividend income from these investments for the three months ended September 28, 2014. Dividend income from these investments was $0.1 million for the three months ended September 29, 2013.

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.


12

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 September 28, 2014 or June 29, 2014.

During the three months ended September 28, 2014, the Company sold available-for-sale securities for total proceeds of $20.0 million, and recognized gross realized gains of $13.0 million. During the three months ended September 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.

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 September 28, 2014
 
Total
 
Level 1
 
Level 2
 
Level 3
Equity securities
8,405

 
8,405

 

 

Total investments at fair value
$
8,405

 
$
8,405

 
$

 
$

 
As of June 29, 2014
 
Total
 
Level 1
 
Level 2
 
Level 3
Equity securities
28,590

 
28,590

 

 

Total investments at fair value
$
28,590

 
$
28,590

 
$

 
$



13

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 September 28, 2014, 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, expenses, 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 $6.7 million in notional amounts of forward contracts not designated as accounting hedges outstanding at September 28, 2014.  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 (income) expense, net, were de minimis and $1.0 million for the three months ended September 28, 2014 and September 29, 2013, respectively.


14

INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. Derivative Financial Instruments (Continued)


At September 28, 2014 and June 29, 2014, the fair value carrying amounts of the Company’s derivative instruments were as follows (in thousands):

 
September 28, 2014
 
Derivative Assets
 
Derivative Liabilities
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value

Put Option

Other assets
 
$
1,684

 
 
 
 
Currency forward contracts
 
 
 
 
Other accrued expenses
 
$
28

Total
 
 
$
1,684

 
 
 
$
28



 
June 29, 2014
 
Derivative Assets
 
Balance Sheet Location
 
Fair Value

Put Option

Other assets
 
$
1,451

Currency forward contracts
Prepaid expenses and other current assets
 
19

Total
 
 
$
1,470


The gain (loss) recognized in earnings as a component of other (income) expense, net, for the Company’s derivatives not designated as hedging instruments during the three months ended September 28, 2014 and September 29, 2013 was comprised of the following (in thousands):
 
Three Months Ended
 
September 28, 2014
 
September 29, 2013
Put Option
$
233

 
$
(325
)
Currency forward contracts
14

 
950

Total
$
247

 
$
625



15

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 September 28, 2014 and June 29, 2014 (in thousands):
 
September 28, 2014
 
Total
 
Level 1
 
Level 2
 
Level 3
Put Option
$
1,684

 
$

 
$

 
$
1,684

Foreign currency derivatives:
 
 
 
 
 
 
 
Liabilities
(28
)
 

 
(28
)
 

Total derivative instruments at fair value, net
$
1,656

 
$

 
$
(28
)
 
$
1,684


 
June 29, 2014
 
Total
 
Level 1
 
Level 2
 
Level 3
Put Option
$
1,451

 
$

 
$

 
$
1,451

Foreign currency derivatives:
 
 
 
 
 
 
 
Assets
19

 

 
19

 

Total derivative instruments at fair value, net
$
1,470

 
$

 
$
19

 
$
1,451



4. Supplemental Cash Flow Disclosures

Components of the changes in operating assets and liabilities during the three months ended September 28, 2014 and September 29, 2013 were comprised of the following (in thousands):
 
Three Months Ended
 
September 28, 2014
 
September 29, 2013
Trade accounts receivable
$
13,806

 
$
(12,661
)
Inventories
(10,383
)
 
(10,824
)
Prepaid expenses and other current assets
(1,113
)
 
(1,127
)
Accounts payable
3,794

 
(74
)
Accrued salaries, wages and commissions
426

 
1,125

Deferred compensation
(243
)
 
160

Accrued income taxes
2,427

 
1,884

Other accrued expenses
5,495

 
323

Changes in operating assets and liabilities, net
$
14,209

 
$
(21,194
)



5. Inventories

At September 28, 2014 and June 29, 2014, inventories were comprised of the following (in thousands):
 
September 28, 2014
 
June 29, 2014
Raw materials
$
45,373

 
$
47,997

Work-in-process
113,751

 
103,034

Finished goods
74,861

 
78,980

Total inventories
$
233,985

 
$
230,011


16

INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. Goodwill and Acquisition-Related Intangible Assets


At September 28, 2014 and June 29, 2014, acquisition‑related intangible assets included the following (in thousands):
 
 
 
September 28, 2014
 
Amortization Periods
(Years)
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net
Completed technology
4 - 12
 
$
52,045

 
$
(44,922
)
 
$
7,123

Customer lists
5 - 12
 
10,430

 
(8,376
)
 
2,054

Intellectual property and other
2 - 15
 
16,763

 
(11,992
)
 
4,771

Total acquisition‑related intangible assets
 
 
$
79,238

 
$
(65,290
)
 
$
13,948


 
 
 
June 29, 2014
 
Amortization Periods
(Years)
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net
Completed technology
4 - 12
 
$
52,045

 
$
(43,771
)
 
$
8,274

Customer lists
5 - 12
 
10,430

 
(8,163
)
 
2,267

Intellectual property and other
2 - 15
 
16,763

 
(11,801
)
 
4,962

Total acquisition‑related intangible assets
 
 
$
79,238

 
$
(63,735
)
 
$
15,503


As of September 28, 2014, the following table represents the total estimated amortization of intangible assets for the remainder of fiscal year 2015 and the five succeeding fiscal years (in thousands):
 
 
 
Fiscal Year
 
Total
 
2015
 
2016
 
2017
 
2018
 
2019
 
2020 and thereafter
Estimated amortization expense
$
13,948

 
$
4,665

 
$
4,681

 
$
1,463

 
$
897

 
$
897

 
$
1,345


At September 28, 2014 and June 29, 2014, the carrying amount of goodwill by reportable segment was as follows (in thousands):
Business Segments:
September 28, 2014
 
June 29, 2014
Energy Saving Products
$
33,190

 
$
33,190

HiRel
18,959

 
18,959

Total goodwill
$
52,149

 
$
52,149



17

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 September 28, 2014, the Company was in compliance with the financial covenants, and there were no amounts outstanding under the Credit Facility.

Bank Letters of Credit

At September 28, 2014, 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 September 28, 2014 and June 29, 2014, other accrued expenses were comprised of the following (in thousands):
 
September 28, 2014
 
June 29, 2014
Sales returns
$
43,903

 
$
40,655

Accrued accounting and legal costs
3,554

 
4,474

Deferred revenue
9,886

 
9,255

Accrued warranty
1,696

 
1,618

Accrued utilities
2,410

 
2,592

Accrued repurchase obligation
3,069

 
2,559

Accrued sales and other taxes
4,741

 
3,661

Accrued subcontractor costs
1,706

 
1,435

Accrued rent
1,065

 
1,393

Other
5,321

 
5,326

    Total other accrued expenses
$
77,351

 
$
72,968



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.


18

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 three months ended September 28, 2014, which is included in other accrued expenses in the table above (in thousands):
Accrued warranty, June 29, 2014
$
1,618

Accruals for warranties issued during the period
742

Changes in estimates related to pre-existing warranties
237

Warranty claim settlements
(901
)
Accrued warranty, September 28, 2014
$
1,696



9. Other Long-Term Liabilities

At September 28, 2014 and June 29, 2014, other long-term liabilities were comprised of the following (in thousands):
 
September 28, 2014
 
June 29, 2014
Income taxes payable
$
3,154

 
$
3,218

Deferred compensation
11,447

 
11,594

Other
4,977

 
4,997

    Total other long-term liabilities
$
19,578

 
$
19,809


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 September 28, 2014 and June 29, 2014 (in thousands):
 
September 28, 2014
 
Total
 
Level 1
 
Level 2
 
Level 3
Employee deferred compensation plan liability
$
9,890

 
$
9,890

 
$

 
$

Assets of employee deferred compensation plan (reported in other assets)
10,732

 
10,732

 

 

 
June 29, 2014
 
Total
 
Level 1
 
Level 2
 
Level 3
Employee deferred compensation plan liability
$
9,844

 
$
9,844

 
$

 
$

Assets of employee deferred compensation plan (reported in other assets)
10,534

 
10,534

 

 



19

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 three months ended September 28, 2014:
 
 
 
Foreign Currency Translation Adjustments
 
Unrealized
Gain (Loss) on
Available-For-Sale Securities
 
Total
Balance at June 29, 2014
 
$
5,336

 
$
11,640

 
$
16,976

Other comprehensive loss before reclassifications
 
(14,244
)
 
(189
)
 
(14,433
)
Amounts reclassified from accumulated other comprehensive income (loss)
 

 
(12,997
)
 
(12,997
)
Tax effects
 

 

 

Net other comprehensive loss
 
(14,244
)
 
(13,186
)
 
(27,430
)
Balance at September 28, 2014
 
$
(8,908
)
 
$
(1,546
)
 
$
(10,454
)

The amounts reclassified out of accumulated other comprehensive income (loss) into the consolidated statements of operations, with presentation location, were as follows:
 
 
 
 
Three Months Ended
Other Comprehensive Income Component
 
Location
 
September 28, 2014
 
September 29, 2013
Unrealized gain (loss) on available-for-sale securities
 
Other (income) expense, net
 
12,997
 
Unrealized gain (loss) on available-for-sale securities
 
Interest income, net
 
 
36


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 three months ended September 28, 2014, the Company did not grant any stock options to Company employees. The following table summarizes the stock option activity for the three months ended September 28, 2014 (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 29, 2014
274

 
$
21.47

 
 
 
$
1,852

Granted

 
$

 
$

 
 
Exercised
(64
)
 
$
21.84

 
 
 
$
962

Expired or forfeited
(25
)
 
$
25.10

 
 
 
 
Outstanding, September 28, 2014
185

 
$
20.85

 
 
 
$
3,435


For the three months ended September 28, 2014 and September 29, 2013, the Company received proceeds of $1.4 million and $9.0 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 either the three months ended September 28, 2014 or September 29, 2013.

20

INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. Stock-Based Compensation (Continued)


During the three months ended September 28, 2014, the Company granted 7,050 Restricted Stock Units ("RSUs") to employees and 27,540 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 Performance Incentive Plan (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 three months ended September 28, 2014 (in thousands, except per share price data):

 
Restricted Stock
Units
 
Weighted Average
 Grant Date
Fair Value Per Share
 
Aggregate
Intrinsic Value
Outstanding, June 29, 2014
3,825

 
$
19.26

 
$
105,791

Granted
35

 
$
39.22

 
 
Vested
(60
)
 
$
24.17

 
$
2,264

Expired or forfeited
(37
)
 
$
23.63

 
 
Outstanding, September 28, 2014
3,763

 
$
19.33

 
$
148,195


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 three months ended September 28, 2014, the Company withheld RSUs representing 4,540 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 September 28, 2014 and June 29, 2014 is as follows (in thousands):
 
September 28, 2014
 
June 29, 2014
Outstanding options exercisable
92

 
175

Options and RSUs available for grant
4,304

 
4,276

Total reserved common stock shares for stock option plans
8,252

 
8,375


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 months ended September 28, 2014 and September 29, 2013, stock‑based compensation expense associated with the Company’s stock options and RSUs was as follows (in thousands):
 
Three Months Ended
 
September 28, 2014
 
September 29, 2013
Cost of sales
$
1,691

 
$
1,248

Selling, general and administrative expense
4,228

 
3,527

Research and development expense
2,160

 
2,087

Total stock‑based compensation expense
$
8,079

 
$
6,862


The total unrecognized compensation expense for outstanding stock options and RSUs was $55.8 million as of September 28, 2014. The weighted average number of years to recognize the total compensation expense for stock options and RSUs are 1.3 and 2.1, respectively.


21

INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. Stock-Based Compensation (Continued)

The Company estimates the fair value of the stock options using the Black‑Scholes option pricing model. There were no stock options granted during the three months ended September 28, 2014. The Company determined the fair value of options granted during the three months ended September 29, 2013 as of the grant date with the following weighted average assumptions:
 
Three Months Ended
 
September 29, 2013
Expected life
3.5 years

Risk free interest rate
0.80
%
Volatility
36.49
%
Dividend yield
0.00
%


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

Asset impairment, restructuring and related 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 related 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 related charges related primarily to the following:

Fiscal Year 2013 El Segundo Fabrication Facility Closure Initiative
Fiscal Year 2013 Newport Fabrication Facility Resizing Initiative


22

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 related charges (recoveries) by initiative for the three months ended September 28, 2014 and September 29, 2013 (in thousands):

 
Three Months Ended
Fiscal Year 2013 Initiatives
September 28, 2014
 
El Segundo
Fabrication Facility Closure Initiative
 
Newport Fabrication Facility Resizing Initiative
 
Total
Reported in asset impairment, restructuring and related charges:
 
 
 
 
 
Severance and workforce reduction costs
$

 
$

 
$

Decommissioning costs

 
142

 
142

Relocation and re-qualification costs

 
357

 
357

Total asset impairment, restructuring and related charges
$

 
$
499

 
$
499


 
Three Months Ended
Fiscal Year 2013 Initiatives
September 29, 2013
 
El Segundo
Fabrication Facility Closure Initiative
 
Newport Fabrication Facility Resizing Initiative
 
Total
Reported in asset impairment, restructuring and related charges:
 
 
 
 
 
Severance and workforce reduction costs (recoveries)
$
(13
)
 
$
141

 
$
128

Decommissioning costs

 
84

 
84

Relocation and re-qualification costs
4

 
1,186

 
1,190

Total asset impairment, restructuring and related charges (recoveries)
$
(9
)
 
$
1,411

 
$
1,402



In addition to the amounts in the tables above, other charges related to the restructuring initiatives recorded in cost of sales were $0.6 million and $0.4 million for the three months ended September 28, 2014 and September 29, 2013, respectively. These charges, which were primarily for accelerated depreciation, are not classifiable as restructuring costs, and were recorded in cost of sales.

The following table summarizes changes in the Company's restructuring related accruals related to its fiscal year 2013 initiatives for the three months ended September 28, 2014, which are included in accrued salaries, wages, and commissions on the balance sheet (in thousands):
Fiscal Year 2013 Initiatives
El Segundo
Fabrication Facility Closure Initiative
 
Newport Fabrication Facility Resizing Initiative
 
Total
Accrued severance and workforce reduction costs at June 29, 2014
$
57


$


$
57

Accrued during the period and charged to asset impairment, restructuring and related charges





Costs paid during the period





Accrued severance and workforce reduction costs at September 28, 2014
$
57


$


$
57




23

INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

Fiscal Year 2013 El Segundo Fabrication Facility Closure Initiative

During fiscal year 2013, the Company adopted a restructuring plan to close its El Segundo wafer fabrication facility. The closure took place in March 2013. During both the three months ended September 28, 2014 and the three months ended September 29, 2013, the Company incurred de minimis asset impairment, restructuring and related charges (recoveries). In connection with the plan, the Company estimates total pre-tax costs of $6.4 million. The estimated total costs consist of $5.8 million of severance and workforce reduction costs, $0.4 million of relocation and re-qualification costs, and $0.2 million of asset impairment costs.

Remaining cash payments for this initiative are estimated to be approximately $0.1 million through December 2014. In addition, the Company estimates it will make total cash expenditures of $2.5 million for the decommissioning and restoration of the El Segundo wafer fabrication facility. These costs were previously considered as part of the asset impairment of the facility recorded in the fourth quarter of fiscal year 2012, and are not anticipated to result in additional restructuring charges.

Fiscal Year 2013 Newport Fabrication Facility Resizing Initiative

During fiscal year 2013, the Company adopted a restructuring plan to resize its wafer fabrication facility in Newport, Wales. The resizing of the facility is planned to take place in several phases, and is expected to be completed by the middle of calendar year 2015. The Company incurred $0.5 million and $1.4 million of asset impairment, restructuring and related charges for the three months ended September 28, 2014 and September 29, 2013, respectively. In connection with the plan, the Company estimates total pre-tax costs of approximately $16.5 million. These consist of approximately $0.7 million of asset impairment costs, $2.6 million of severance and workforce reduction costs, $4.5 million of decommissioning costs, and $8.7 million of relocation and re-qualification costs.

In addition to the restructuring charges above, the Company recorded $0.6 million and $0.4 million of other charges related to the restructuring initiative in cost of sales for the three months ended September 28, 2014 and September 29, 2013, respectively. These other charges, which were for accelerated depreciation, are not classifiable as restructuring costs.

Cash payments for this initiative were $0.5 million and $1.3 million for the three months ended September 28, 2014 and September 29, 2013, respectively. Remaining cash payments for this initiative are estimated to be approximately $6.3 million.



24

INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13. Segment Information


The Company reports in six segments which correspond to the way the Company manages its business and interacts with customers. These reportable segments, which correspond to operating segments include:

Power Management Devices (“PMD”) - The PMD segment provides high performance power MOSFETs
with the widest range of packages up to 250V within the power management semiconductor industry for a range of applications including power supply, data processing, telecommunications, industrial, and commercial battery-powered systems. Key products used by the PMD segment include Trench HEXFET®MOSFETs, Discrete HEXFET®MOSFETs, Dual HEXFET®MOSFETs, FETKY®s, and DirectFET®s.

Energy Saving Products (“ESP”) - The ESP segment provides integrated design platforms that enable our customers to add energy-conserving features to help achieve lower operating energy and manufacturing costs. The integrated design platforms incorporate silicon packaging technology to help improve system performance. The ESP segment’s primary market applications include motor control appliances, industrial automation, lighting and display, audio and video. The ESP segment’s key products include analog HVICs and IGBT platforms, digital control ICs and IRAM integrated power modules. The ESP segment’s iMotion platform targets the growing trend towards variable speed motors in the appliance market.

Automotive Products (“AP”) - The AP segment provides high performance and energy saving solutions for a broad variety of automotive systems, ranging from typical 12V power net applications up to 1200V hybrid electric vehicle applications. The Company's automotive expertise includes supplying products for various automotive applications including AC and DC motor drives of all power classes, actuator drivers, automotive lighting (such as high intensity discharge lamps), direct fuel injection for diesel and gasoline engines, hybrid electric vehicle power train and peripheral systems for micro, mild, full and plug-in hybrids for electric vehicles, as well as for body electronic systems like glow plugs, Positive Temperature Coefficient (“PTC”) heaters, electric power steering, fuel pumps, Heating Ventilation and Air Conditioning (“HVAC”) and rear wipers. The Company's automotive product designs are used in solutions, integrated circuits (“ASICs”) and standard parts (“ASSPs”) and generic high volume products for multiple original equipment manufacturer (“OEM”) platform usage. The AP segment's key products include HVICs, intelligent power switch ICs, power MOSFETs including DirectFET®, IGBTs, Diodes and advanced power modules.

Enterprise Power (“EP”) – The EP segment provides high performance analog and digital end-to-end power solutions for servers, storage, routers, switches, infrastructure equipment, graphic cards, and gaming consoles. IR offers a broad portfolio of power management system products that deliver benchmark power density, efficiency and performance. The EPBU segment's key products include CHiL digital PWM controllers, PowIRstagesTM, SupIRBuckTM, DirectFET® discretes, iPOWIR® voltage regulators, and Low voltage IC's. The large and growing server market has placed an emphasis and premium on digital control, telemetry, power density, efficiency and performance. The Company sees this trend increasing in other EP segment target applications. The Company offers a broad portfolio of digital and analog power management solutions that deliver benchmark power density, efficiency and performance. The EP segment's key products include our DirectFET® discrete products, CHiL digital PWM controllers, power monitoring products, XPhase®, SupIRBuckTM, iPOWIR® voltage regulators, Low voltage ICs, and PowIRstagesTM.

HiRel - The HiRel segment provides high-reliability power components and sub-assemblies designed to address power management requirements in mission critical applications including satellites and space exploration vehicles, military hardware, and other high reliability applications such as commercial aircraft, undersea telecommunications, and oil drilling in heavy industry, as well as products used in biomedical applications. The HiRel segment has a legacy of more than thirty years of experience in many of these applications, has developed strategic relationships with major system integrators worldwide and has the knowledge, technology and processes required to meet the requirements of customers in the high-reliability markets. The HiRel segment's key products include RAD-Hard discretes, RAD-Hard ICs, power management modules, DC-DC converters, High Temperature converters, and Energy Storage Systems.


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INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13. Segment Information (Continued)



Intellectual Property (“IP”) - The IP segment includes revenues from the sale of the Company’s technologies and manufacturing process know-how, in addition to the operating results of the Company’s patent licensing and settlements of claims brought against third parties. The Company continues, from time to time, to seek opportunistic licensing arrangements that it believes are consistent with its business strategy.
 

The Company does not allocate assets, sales and marketing, information systems, finance and administrative costs and asset impairment, restructuring and related charges to the operating segments, as these are not meaningful statistics to the Chief Executive Officer ("CEO") in making resource allocation decisions or in evaluating performance of the operating segments. Because operating segments are generally defined by the products they design and sell, they do not make sales to each other.

The Company does not directly allocate assets to its operating segments, nor does the CEO evaluate operating segments using discrete asset information. However, depreciation and amortization related to the manufacturing of goods is included in gross profit for the segments as part of manufacturing overhead. Due to the Company’s methodology for product level costing, it is impractical to determine the amount of depreciation and amortization included in each segment’s gross profit.

The Company’s “Customer Segments” as referred to herein include its PMD, ESP, AP, EP and HiRel reporting segments.

For the three months ended September 28, 2014 and September 29, 2013, revenues and gross margin by reportable segments were as follows (in thousands, except percentages):

 
 
Three Months Ended
 
 
September 28, 2014
 
September 29, 2013
Business Segment
 
Revenues
 
Percentage
of Total
 
Gross
Margin
 
Revenues
 
Percentage
of Total
 
Gross
Margin
Power Management Devices
 
$
101,419

 
35.3
%
 
33.9
%
 
$
101,966

 
37.8
%
 
30.9
%
Energy Saving Products
 
52,926

 
18.4

 
25.5

 
50,497

 
18.7

 
32.8

Automotive Products
 
36,790

 
12.8

 
28.1

 
36,463

 
13.5

 
32.4

Enterprise Power
 
36,204

 
12.6

 
43.3

 
32,249

 
12.0

 
37.4

HiRel
 
59,334

 
20.7

 
58.3

 
48,333

 
17.9

 
47.9

Customer Segments Total
 
286,673

 
99.9

 
37.8

 
269,508

 
99.9

 
35.3

Intellectual Property
 
315

 
0.1

 
100.0

 
242

 
0.1

 
100.0

Consolidated Total
 
$
286,988

 
100.0
%
 
37.9
%
 
$
269,750

 
100.0
%
 
35.3
%



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INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. Income Taxes


The Company accounts for its provision for income taxes in accordance with Accounting Standards Codification (“ASC”) 740, Income Taxes. In accordance with ASC 740, the Company uses an estimate of its annual effective rate for the full fiscal year in computing the year-to-date provision for income taxes for the interim periods, including federal, foreign, state and local income taxes.  The effective tax rate differs from the statutory U.S. income tax rate due to changes in the reserve for uncertain tax positions, taxes in foreign jurisdictions, withholding and other taxes. The Company recorded a tax expense of $5.4 million and $6.9 million for the three months ended September 28, 2014 and September 29, 2013, respectively.

The Company evaluates its net deferred income tax assets quarterly to determine if valuation allowances are required. Based on the consideration of all available evidence using a “more-likely-than-not” standard, as of September 28, 2014, the Company has determined that the valuation allowance established against its federal and state deferred tax assets in the U.S. should remain in place through fiscal year 2015.  These valuation allowances relate to the Company's beginning of fiscal year 2015 balances of reserves, which were initially established during fiscal year 2009.

The Company operates in multiple foreign jurisdictions with lower statutory tax rates compared to the U.S., and its operations in Singapore generally have the most significant impact on the Company’s overall effective tax rate. During fiscal year 2011, the Company was granted incentives, which were then amended in fiscal year 2013, by the Singapore Economic Development Board. The incentives are conditioned upon the Company meeting certain employment and investment thresholds which have been met to date, and are expected to be met in future periods. As a result of these incentives, the Company operates under a tax holiday in Singapore, effective from December 27, 2010 through December 26, 2022. The Company did not realize a benefit from this tax holiday for this reporting period.

The Company established liabilities for possible assessments by tax authorities resulting from known tax exposures including, but not limited to, international tax positions and certain tax credits. Management believes that an appropriate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any conclusions arising from the tax audits are resolved in a manner not consistent with management's expectations, the Company would be required to adjust its provision for income tax in the period in which such resolution occurs. During the three months ended September 28, 2014, the Company's reserve for uncertain tax positions increased by $0.2 million primarily due to new accruals of uncertain tax positions in various jurisdictions.

As of September 28, 2014, U.S. income taxes have been provided on approximately $9.3 million of undistributed earnings of foreign subsidiaries. The remaining unrepatriated foreign earnings are considered by the Company to be invested indefinitely.

Pursuant to Sections 382 and 383 of the U.S. Internal Revenue Code (the "Code"), the utilization of net operating losses (“NOLs”) and other tax attributes may be subject to substantial limitations if certain ownership changes occur during a three-year testing period (as defined under the Code). As of September 28, 2014, the Company does not believe an ownership change has occurred that would limit the Company's utilization of any NOL, credit carry forward or other related tax attributes.


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INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15. Net Income per Common Share


Basic earnings per share ("EPS") is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and RSUs.
The table below provides a computation of basic and diluted earnings per share for the three months ended September 28, 2014 and September 29, 2013 (in thousands, except per share amounts):
 
Three Months Ended
 
September 28, 2014
 
September 29, 2013
Net income
$
25,930

 
$
8,723

Net income per common share – basic
 
 
 
Basic weighted average common shares outstanding
71,575

 
70,830

Basic net income per common share
$
0.36

 
$
0.12

Net income per common share – diluted
 
 
 
Basic weighted average common shares outstanding
71,575

 
70,830

Effect of dilutive securities – stock options and RSU’s
1,398

 
834

Diluted weighted average common shares outstanding
72,973

 
71,664

Diluted net income per common share
$
0.36

 
$
0.12


For the three months ended September 28, 2014, de minimis shares of common stock equivalents were anti-dilutive and were not included in the computation of diluted earnings per share for these periods. For the three months ended September 29, 2013, 0.2 million shares of common stock equivalents, were anti-dilutive and were not included in the computation of diluted earnings per share for these periods. In addition, for the three months ended September 28, 2014 and September 29, 2013, 0.4 million and 1.2 million shares, respectively, of contingently issuable RSUs for which all necessary conditions had not been met were not included in the computation of diluted earnings per share.


16. Environmental Matters

General. Federal, state, local and foreign 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, and on the operation of the Company's facilities and equipment. The Company believes it uses reasonable efforts to maintain a system of compliance and controls for these laws and regulations. Despite its efforts and controls, from time to time, issues may arise with respect to these matters. Additionally, under some of these laws and regulations, the Company 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, the Company may be subject to common law claims if released substances damage or harm third parties. The Company 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 the Company's results of operations, financial position or cash flows, as could any failure by or violation of the Company to comply with any prior, current or future environmental laws and regulations.


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INTERNATIONAL RECTIFIER CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

16. Environmental Matters (Continued)


Angeles Chemical Company, Inc. et al. v. Omega Chemical PRP Group, LLC et al. In November 2007, the Company was named as one of approximately 100 defendants in Angeles Chemical Company, Inc. et al. v. Omega Chemical PRP Group, LLC et al., No. EDCV07-1471 (TJH) (JWJx) (C.D. Cal.) (the "Angeles Case"). Angeles Chemical Company, Inc. and related entities ("Plaintiffs") own or operate a facility (the "Angeles Facility") down gradi