Summer Has Been a Bummer For International Rectifier

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With a growing accounting scandal that has left a trail of banished senior managers in its wake, it’s been a rough summer for International Rectifier Corp.


After discovering in April that fraud by the company’s Japanese subsidiary had rendered at least six quarters of financial reports unreliable, the El Segundo semiconductor manufacturer has fired its chief financial officer, placed its chief executive on leave and accepted the resignation of its head of global sales.


What’s more, two weeks ago it admitted that its accounting irregularities extended even further than originally thought.


The extent of the troubles has left some analysts scratching their heads as to how a company particularly one with 60 years of experience, a global reach and a market value of nearly $3 billion could suffer such problems. And while its stock has dropped moderately, there is no indication as to when the issues will be resolved.


“It seems like there’s quite a mess there,” said Steven Smigie, an analyst with Raymond James & Associates Inc. who at the end of August lowered his revenue expectations and downgraded the company’s stock to “underperform” from “market perform.” “They’ve got quite a lot of stuff to work through.”


International Rectifier, founded in 1947, has become a leader in the field of power management. The company produces semiconductors, and power components and systems for computers and electronics. Sony Corp.’s popular Playstation 3 contains one of its power devices.


When it seemed the situation could not get worse, the company on Aug. 31 told the Securities and Exchange Commission that in addition to accounting irregularities related to fraud at the Japanese subsidiary, it had identified problems with its “transfer pricing methodology” and “other tax issues for its fiscal years 2002 through 2007.”


It has not been more specific about the latest problems, but it has stated that reported earnings from at least 12 quarters over the past four years are no longer accurate. The company is working to refile them. A spokesman for the company said executives would not comment.



False sales

The problems started for International Rectifier on April 9, when preliminary results of an independent audit committee probe were made public. The investigation found that the company’s Japanese subsidiary, International Rectifier Japan Co. Ltd. responsible for about 10 percent of the company’s $1.3 billion in annual revenue had deliberately and repeatedly recorded false or unsubstantiated orders.


“The company’s Japan subsidiary circumvented established controls and processes to record false or premature sales by creating fictitious customer purchase orders in the existing control system,” the company said in a recent SEC filing.


The company said the scam was accomplished by diverting shipments to Japan to “third party” warehouses and then recording the shipments as sales. As of April, the value of goods in off-the-books warehouses stood at $16 million.


International Rectifier has since taken steps to correct the problems, including removing some members of the subsidiary’s management, performing a full physical count of all inventory and putting new oversight measures in place.


Nevertheless, since the public revelation of the scandal, three senior managers have fallen.


On July 2, the company fired Chief Financial Officer Michael McGee, but declined to publicly state the reason. That day, Robert Grant, executive vice president of global sales and marketing, resigned. Then-Chief Executive Alex Lidow assumed Grant’s duties. On Aug. 30, Lidow was placed on leave.


International Rectifier said Lidow’s leave was “in the best interests of the company” and added that the executive has not been accused of any wrongdoing but he has not been cleared either. The company is withholding compensation pending the outcome of the investigation.


Lidow’s removal came the day before International Rectifier revealed its additional accounting errors.


Yet investors haven’t punished the stock much. The company’s stock dropped sharply to about $36 the day the troubles were announced in April, but rallied and closed as high as $39 in late August. It has sunk since, closing at $34.24 on Sept. 6.


Steven Park, an analyst who tracks International Rectifier for Wedbush Morgan Securities Inc., acknowledged the controversy has only seemed to grow since the first revelation of wrongdoing, but he expects the matter to be mostly resolved in three to six months.


What’s more, with its experience and the strength of its business model, he said the company likely won’t suffer any long-term damage and should remain a leading player in the field.


“We like the stock. There may be some volatility as this thing comes forward, but we think the business trend for the company will remain relatively strong,” Park said.

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