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International Rectifier Corp. Reports Operating Results (10-Q)

November 02, 2012 | About:
10qk

10qk

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International Rectifier Corp. (IRF) filed Quarterly Report for the period ended 2012-09-23.

International Rectifier has a market cap of $1.08 billion; its shares were traded at around $16.04 with and P/S ratio of 1.

Highlight of Business Operations:

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, the Company determined that the valuation allowance established against its federal and California deferred tax assets in the U.S. should remain in place through fiscal year 2013. These valuation allowances relate to beginning of the year balances of reserves that were established during fiscal year 2009. During fiscal year 2012, the Company had released a remaining $28.6 million valuation allowance established against its deferred tax assets in the United Kingdom ("U.K.") as a result of cumulative pretax income generated by our U.K. subsidiary. During fiscal years 2011 and 2012, the Company recorded deferred charges and valuation allowances related to certain intercompany transactions which reduced the respective deferred tax assets and associated valuation allowances in the U.K. and U.S. Due to quarterly amortization of the deferred charge and valuation allowance for the three months ended September 23, 2012, these U.K. items were reduced by $0.7 million and $0.3 million, respectively, with the rest of them being an expense within the tax provision. As a result of quarterly amortization of the deferred charge and valuation allowance for the three months ended September 23, 2012, these U.S. items were reduced by $0.5 million and $0.4 million, respectively, with the rest of them being an expense within the tax provision. The Company operates in multiple foreign jurisdictions with lower statutory tax rates, and its operations in Singapore generally have the most significant impact on the Company's effective tax rate. During fiscal year 2011, the Company was granted certain incentives by the Singapore Economic Development Board. As a result, the Company operates under a tax holiday in Singapore, effective from December 27, 2010 through December 26, 2020. The tax holiday is conditioned upon the Company meeting certain employment and investment thresholds. During the three months ended September 23, 2012, the reserve for uncertain tax positions increased by $0.8 million to $49.7 million. This increase resulted primarily from changes in currency exchange rates related to prior year uncertain tax positions in certain foreign jurisdictions and additional reserves for state credits accrued during the three months ended September 23, 2012. For fiscal year 2013, $0.1 million of increases to uncertain tax positions, if recognized, would affect the effective tax rate. The reserve is expected to decrease by $4.4 million during the next 12 months. As of September 23, 2012, the Company had accrued $3.2 million of interest and penalties related to uncertain tax positions. For the three months ended September 23, 2012, penalties and interest included in the reserves increased by $0.1 million. While it is often difficult to predict the final outcome or the timing of the resolution of any particular uncertain tax position, the Company believes its reserve for income taxes represents the most probable outcome. The Company adjusts this reserve, including the portion related to interest, in light of changing facts and circumstances. As of June 24, 2012, U.S. income taxes have not been provided on approximately $95.3 million of undistributed earnings of foreign subsidiaries since those earnings are considered to be invested indefinitely. Determination of the amount of unrecognized deferred tax liabilities for temporary differences related to investments in these non-U.S. subsidiaries that are essentially permanent in duration is not practicable. The Company has not recorded a deferred tax liability on any potential gain as the earnings and profits of the subsidiary had been recognized as U.S. income in previous periods. Pursuant to Sections 382 and 383 of the U.S. Internal Revenue 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). 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 tax attributes.

During fiscal years 2011 and 2012, the Company recorded deferred charges and valuation allowances related to certain intercompany transactions which reduced the respective deferred tax assets and associated valuation allowances in the U.K. and U.S. Due to quarterly amortization of the deferred charge and valuation allowance for the three months ended September 23, 2012, these U.K. items were reduced by $0.7 million and $0.3 million, respectively, with the rest of them being an expense within the tax provision. As a result of quarterly amortization of the deferred charge and valuation allowance for the three months ended September 23, 2012, these U.S. items were reduced by $0.5 million and $0.4 million, respectively, with the rest of them being an expense within the tax provision. The Company operates in multiple foreign jurisdictions with lower statutory tax rates, and its operations in Singapore generally have the most significant impact on the Company's effective tax rate. During fiscal year 2011, the Company was granted certain incentives by the Singapore Economic Development Board. As a result, the Company operates under a tax holiday in Singapore, effective from December 27, 2010 through December 26, 2020. The tax holiday is conditioned upon the Company meeting certain employment and investment thresholds. During the three months ended September 23, 2012, the reserve for uncertain tax positions increased by $0.8 million to $49.7 million. This increase resulted primarily from changes in currency exchange rates related to prior year uncertain tax positions in certain foreign jurisdictions and additional reserves for state credits accrued during the three months ended September 23, 2012. For fiscal year 2013, $0.1 million of increases to uncertain tax positions, if recognized, would affect the effective tax rate. The reserve is expected to decrease by $4.4 million during the next 12 months. As of September 23, 2012, the Company had accrued $3.2 million of interest and penalties related to uncertain tax positions. For the three months ended September 23, 2012, penalties and interest included in the reserves increased by $0.1 million. While it is often difficult to predict the final outcome or the timing of the resolution of any particular uncertain tax position, the Company believes its reserve for income taxes represents the most probable outcome. The Company adjusts this reserve, including the portion related to interest, in light of changing facts and circumstances. As of June 24, 2012, U.S. income taxes have not been provided on approximately $95.3 million of undistributed earnings of foreign subsidiaries since those earnings are considered to be invested indefinitely. Determination of the amount of unrecognized deferred tax liabilities for temporary differences related to investments in these non-U.S. subsidiaries that are essentially permanent in duration is not practicable. The Company has not recorded a deferred tax liability on any potential gain as the earnings and profits of the subsidiary had been recognized as U.S. income in previous periods. Pursuant to Sections 382 and 383 of the U.S. Internal Revenue 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). 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 tax attributes.

During the first quarter of fiscal year 2013, we adopted a restructuring plan to close our El Segundo wafer fabrication facility by the third quarter of fiscal year 2013 with estimated total pre-tax costs of $9.0 million. These consist of $5.7 million of severance and workforce reduction costs, $2.1 million of decommissioning costs, and $1.2 million of relocation and re-qualification costs. The restructuring charge recorded during the three months ended September 23, 2012 included $5.7 million of severance costs and workforce reduction costs. In addition, during the three months ended September 23, 2012, we recorded $0.9 million of other charges related to the restructuring initiative in cost of sales that affected the ESP reporting segment. These other charges, which were for accelerated depreciation and inventory write-downs, are not classifiable as restructuring costs, and were therefore recorded in cost of sales. During the first quarter of fiscal year 2013, cash payments for this initiative were $0.8 million and are estimated to be approximately $6.2 million and $2.0 million for the remainder of fiscal year 2013, and thereafter, respectively. After the completion of this initiative, we estimate annual cost savings of approximately $10 million. These cost savings are the result of reduced manufacturing overhead costs, which will impact cost of sales. We do not anticipate these overhead cost savings to be offset by additional costs incurred in other locations.

During the first quarter of fiscal year 2013, we adopted a restructuring plan to close our El Segundo wafer fabrication facility by the third quarter of fiscal year 2013 with estimated total pre-tax costs of $9.0 million. These consist of $5.7 million of severance and workforce reduction costs, $2.1 million of decommissioning costs, and $1.2 million of relocation and re-qualification costs. The restructuring charge recorded during the three months ended September 23, 2012 included $5.7 million of severance costs and workforce reduction costs. In addition, during the three months ended September 23, 2012, we recorded $0.9 million of other charges related to the restructuring initiative in cost of sales that affected the ESP reporting segment. These other charges, which were for accelerated depreciation and inventory write-downs, are not classifiable as restructuring costs, and were therefore recorded in cost of sales.

During the first quarter of fiscal year 2013, we undertook certain actions to reduce (i) capacity at manufacturing facilities in Mexico, California, and Arizona, as well as (ii) administrative and research and development costs around the world. As part of the plan, we estimate that we will incur approximately $4.2 million of severance and other workforce reduction costs by the end of fiscal year 2013. In connection with that effort, during the three months ended September 23, 2012, we incurred approximately $3.3 million of severance and workforce reduction costs. The severance and workforce reduction costs recorded during the three months ended September 23, 2012 included $2.1 million related to other manufacturing facilities in Mexico, California, and Arizona, and $1.2 million for administrative and research and development functions around the world. We continue to review our manufacturing footprint and identify additional cost reduction opportunities, and the nature, timing and extent of our restructuring activities are not yet complete. Accordingly, and as part of those ongoing efforts, we may also incur asset write-downs related to the ultimate disposition of certain manufacturing equipment; any such potential future asset write-downs do not meet the criteria under GAAP to be accrued at this time. During the first quarter of fiscal year 2013, cash payments for this initiative were $1.9 million and are estimated to be approximately $2.3 million for the remainder of fiscal year 2013. After the completion of this initiative, we estimate annual cost savings of approximately $13 million. These cost cuts will result in reduced cost of sales, as well as lower SG&A and R&D expenses. We do not anticipate these cost savings to be offset by additional costs incurred in other locations.

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