IRF » Topics » Overview of Fiscal Year 2005 Results

This excerpt taken from the IRF 10-K filed Sep 16, 2005.

Overview of Fiscal Year 2005 Results

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

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

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

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

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

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

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

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

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

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

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

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

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

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