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International Rectifier Corporation (IRF)

Fiscal Q3 2011 Earnings Conference Call

May 2, 2011 5:00 p.m. EDT


Chris Toth – Investor Relations

Ilan Daskal – CFO, EVP

Oleg Khaykin – President, CEO, Director


Steve Smigie – Raymond James

James Schneider – Goldman Sachs

Brian Piccioni – BMO Capital

Ramesh Misra – Brigantine Advisors

Craig Berger – FBR Capital Markets

Bill Ong – Merriman Capital

Stephen Chin – UBS



Good afternoon. My name is [Chanelle] and I will be your conference operator today.

At this time I would like to welcome everyone to the Fiscal Year 2011 Third Quarter 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. If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you.

I will now turn the conference over to Chris Toth with Investor Relations. Sir, you may begin.

Chris Toth

Thank you, [Chanelle], and good afternoon. If you have not already read through our press release issued earlier today, it can be found on our website at in the Investor Relations section. Our quarterly report on Form 10-Q is expected to be filed with the SEC today, Monday 2, 2011, and can be accessed using the same web address.

This call is being broadcast over the internet and can also be found through the IRF web address. A conference call replay will be available following this call through May 9, 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.

Before we begin, I would also like to mention the following upcoming events. On May 10 we will be presenting at the JMP Securities' Research Conference in San Francisco, and on June 8 we will be attending the Raymond James Spring Investors' Conference in Boston.

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 third quarter of fiscal 2011, IR reported a revenue of $296.7 million, which was a 5.3% increase from the prior quarter and a 22.7% from the third quarter of fiscal year 2010. Revenue growth accelerated as we continued to see a healthy demand in the appliance, industrial and automotive end-markets. We also saw a good growth in the high-performance computing market.

Gross margin was 39.5% which was at the high end of our quarterly guidance. We reported a net income of $49.5 million or $0.69 per fully diluted share compared with $43.9 million or $0.62 per fully diluted share in the December quarter. The March quarter results included a $6.5 million gross tax benefit and a $3.5 million reversal of asset impairments, restructuring and other charges. Combined, these two items benefited fully diluted earnings per share by $0.14.

In the earnings per share calculation, please note that even though the company does pay dividends, accounting rules require us to allocate a portion of net income to any unvested restricted stock units, of which we could pay dividends equivalent. In the March quarter, the amount of net income excluded from the earnings per share calculation was about $733,000. If you do not make these adjustments, you will calculate the diluted earnings per share to be $0.01 higher than what we had reported.

For the March quarter, R&D expenses were $30.7 million which represented 10.4% of revenue. SG&A expenses were $46.7 million which represented 15.7% of revenue.

In light of the continued growth and demand that we see for our products, we do not intend to close any of our fabs for the foreseeable future. As a result, we have credited the remaining $3.5 million severance reserves.

Operating income for the quarter was $41.6 million and represented 14% of sales for the quarter. Other income net was $1.3 million in the March quarter and interest income net was $2.7 million, primarily from the sale of investments.

Income tax for the quarter was a $3.9 million benefit due primarily to a release of tax reserves and other discrete items totaling $6.5 million, which was partially offset by about $2.6 million in tax accruals in our foreign jurisdictions.

The total cash, cash equivalents and investments at the end of the third quarter was $490 million, which included $3 million of restricted cash. At the end of the March quarter, Level 3 investments were $9.3 million.

During the quarter we increased inventory by $17.5 million to $240.6 million. Weeks of inventory are now about 17-1/2 weeks. The largest increase was in die bank inventory as we replenished our stock to better position IR to respond to increasing demand over the next several quarters.

Cash from operating activities in the quarter was $3.9 million, lower than the last quarter, primarily from the increase in working capital. Cash capital expenditures were $38 million which was 12.8% of revenue. Depreciation and amortization expense was $19 million and stock-based compensation was $3.4 million. During the quarter we purchased 235,000 shares of our stock at the total cost of $7.7 million. We had 69.8 million shares outstanding at the end of the March quarter.

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