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International Rectifier Corporation (IRF)

F2Q2011 Earnings Call Transcript

January 31, 2011 4:30 pm ET

Executives

Chris Toth – IR

Ilan Daskal – CFO

Oleg Khaykin – President and CEO

Analysts

Steve Smigie – Raymond James

James Schneider – Goldman Sachs

Bill Ong – Merriman Capital

Bin Jiang [ph] – Citi

Ramesh Misra – Brigantine Advisors

Craig Berger – FBR

Stephen Chin – UBS

Brian Piccioni – BMO Capital Markets

Presentation

Operator

Good afternoon. My name is Carrie and I will be your conference operator today. At this time, I would like to welcome everyone to the International Rectifier second quarter fiscal year 2011 conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator instructions)

Thank you. Mr. Toth, you may begin your conference.

Chris Toth

Thank you, Carrie and good afternoon. If you have not already read through our press release issued earlier today, it can be found on our website at investor.irf.com, in the Investor Relations section. Our quarterly report on Form 10-Q is expected to be filed with the SEC tomorrow Monday, January 31, 2011 and can also be accessed using the same web address. This call is being broadcast over the internet and can also be accessed through IR's web address. A conference call replay will be available through February 7, 2011. After our prepared comments, we will open the line for questions.

Our discussion today will include some forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. We caution that such statements are subject to a number of uncertainties and actual results may differ materially. Risk factors that could affect the company's actual results are included in our press release issued today, and the company's filings with the SEC, including the most recent Forms 10-K and 10-Q.

Now Ilan will discuss our most recent financials. Ilan?

Ilan Daskal

Thank you, Chris. Good afternoon and thank you all for joining us. For the second quarter of fiscal 2011, IR reported the revenue of $281.7 million, which was a slight increase from the prior quarter, and a 34% increase from the second quarter of fiscal year 2010. We continue to see a healthy demand in the appliance, industrial and automotive end markets.

Gross margin was 43%, up 430 basis points compared with the prior quarter, and significantly above the guidance. The upside in gross margin relative to our guidance was primarily from lower manufacturing cost as a result of higher cost absorption associated with increased level of inventory build in anticipation of future demand, and a strong product mix within our PMD, Enterprise Power, and ESP business units.

We reported a net income of $43.9 million or $0.62 per fully diluted share compared with $33.5 million or $0.47 per fully diluted share in the September quarter.

The September quarter results included a $3.8 million gross tax benefit that increased fully diluted earnings per share by $0.05. For the December quarter, R&D expenses were $28.5 million, which represented 10.1% of revenue. SG&A expenses were $46.6 million, which represented 16.5% of revenue. Operating income for the quarter was $44.6 million, an increase of 41% compared with the prior quarter.

Operating income represented 15.8% of sales for the quarter. Other expense net was $1.7 million in the December quarter and interest income net was $4.2 million primarily due to realized gains from sales of our level 3 securities.

Income tax for the quarter was $3.1 million due primarily to tax in our foreign jurisdictions. The total cash, cash equivalents and investments at the end of the second quarter was $602.5 million, which included $3.4 million of restricted cash. We have managed to further reduce our level 3 investments to $16.1 million the lowest level at IR in many years.

During the quarter we increased inventory by $35.6 million to $223.2 million or about 18 weeks. The largest increase was in our guidance [ph] inventory as we replenish our stock to better position IR to respond to demand.

Cash from operating activities in the quarter was $55.4 million and free cash flow was $22.4 million. Cash capital expenditures were $32.9 million, which was 11.7% of revenue. Depreciation and amortization expenses were $19.6 million and stock based compensation was $3.7 million. During the quarter, we purchased 170,000 shares of our stock at a total cost of $4.9 million. We had 69.8 million shares outstanding at the end of the December quarter.

Moving on to our outlook. Continued strength in our appliance, industrial and automotive markets should allow us to grow our revenue compared with the December quarter. We currently expect revenue for the March quarter to be between $285 million and $295 million. For this projected revenue range, we currently estimate gross margin in the March quarter to be between 39% and 39.5%. We expect the gross margin to decrease from the prior quarter due to an increase in silicon costs, lower expected cost absorption as a result of lower production volumes, and lower gross margin product mix.

We expect our R&D expenses to be between $30 million and $31 million and SG&A expenses to be about $47 million in the March quarter. Another expense net is expected to be about $1 million and interest income net is expected to be between $1 and $2 million. Tax expenses for the remainder of fiscal year 2011 are expected to be between $3 million and $4 million per quarter. We also believe we may release additional valuation allowances resulting in a benefit to the income statement during the remainder of fiscal year 2011.

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